ECR survey results Q4 2019: Risk down for Greece, Russia, Nigeria, but Argentina, Hong Kong, Turkey dive

EuroMoney – Global risk subsided in the final months of 2019, according to Euromoney’s country risk survey, as signs of a breakthrough emerged to end the deadlock over the China-US trade dispute, inflation eased, elections delivered more certain outcomes, and policymakers turned to stimulus measures to support economic growth.

The mean average global risk score improved from the third to fourth quarter as business confidence stabilized and political risks calmed, although it was still below 50 out of a possible 100 points, where it has remained ever since the global financial crisis of 2007-2008.

The low score is signalling that there is still a good deal of discomfort in the global investor outlook, with protectionism and climate change casting a shadow, the Hong Kong crisis persisting, US elections looming and the situation with Iran among many other features keeping the global risk temperature heightened for the time being.

Experts downgraded most of the G10 in 2019, including France, Germany, Italy, Japan, the UK and US, as trade frictions eroded economic performance and political pressures increased –including the Brexit difficulties prompting another snap general election – though the situation stabilized in the fourth quarter.

The economic growth of advanced economies slowed for a second successive year, dropping below 2% in real terms, according to the IMF, owing to protectionism between the US and China on the one hand, and the US and EU on the other.

Risk scores worsened in Latin America, with downgrades occurring to Brazil, Chile, Ecuador and also Paraguay in the final months of 2019, partly driven by social instability.

Argentina’s economic difficulties and the electoral outcome are also unnerving investors as the country embarks on yet another debt restructuring.

Analysts lowered their scores for various other emerging and frontier markets, including India, Indonesia, Lebanon, Myanmar (ahead of this year’s elections), South Korea (also facing elections in April), and Turkey, as confidence in the political climate and economy waned.

Interminable problem

Hong Kong’s score fell further too, as the protests showed no signs of easing following huge gains for pro-democracy candidates at the district council elections in November.

With consumption, exports and investment nosediving, and tourist arrivals plummeting, GDP is likely to have declined in real terms by 1.9% last year while forecast to grow by just 0.2% in 2020 according to the IMF.

Hong Kong’s future as a business hub and financial centre will be doomed by political gridlock believes Friedrich Wu, an ECR survey contributor based at the Nanyang Technology University in Singapore.

“The protesters have taken an ‘all-or-nothing’ approach (‘Five Demands, Not One Less’). Instead of granting these demands, which challenge Beijing’s sovereign rights, I believe Beijing will instead tighten its ropes on Hong Kong.”

On the issue of sovereignty, Wu says that Beijing will never compromise regardless of how painful the consequences are. Besides, Hong Kong is no longer the indispensable ‘goose that lays the golden eggs’, he suggests.

“From the world’s number one container port in 2000, Hong Kong has now fallen to number seven, behind Shanghai, Singapore, Ningbo-Zhoushan, Shenzhen, Busan and Guangzhou; and number eight, Qingdao, is rising fast and will overtake it in two to three years.”

Likewise, according to the latest, September 2019 Global Financial Centres Index of London, while HK was still ranked number three, Shanghai moved up to the fifth position overtaking Tokyo, while Beijing and Shenzhen were ranked seventh and ninth respectively.

“HK’s role as an economic/financial interface between the mainland and the rest of the world is diminishing fast. That’s why Beijing can afford to take a more hard-line position toward the protesters,” Wu says.

As for Taiwan, he adds, the political developments in Hong Kong will only harden their attitude against closer ties with China, though economically the demise of Hong Kong will not have any great impact on the Taiwanese economy, which is actually more integrated with the mainland.

Buttressed by this economic resilience, Taiwan’s risk score improved in the fourth quarter, the survey shows.
Singapore will be the chief beneficiary of Hong Kong’s decline, Wu says.

“Many multinational corporations with their regional headquarters in Hong Kong will consider shifting their domiciles to Singapore and high net worth individuals will park some of their wealth in Singapore’s well-regulated financial sector and property market.”

Tiago Freire, another contributor to the survey, who has experience working in both China and Singapore, is more cautious. He argues that while Singapore will benet from some companies moving their operations from Hong Kong to Singapore, in particular, financial companies, he does not believe it is as “well-positioned as Hong Kong to operate as a gateway to China for foreign companies”.

Singapore’s score even declined in the fourth quarter, mainly resulting from downgrades to the demographics factor, one of several structural indicators in the survey.

“The last quarter we saw some developments that put more pressure on Singapore’s demographic stability”, says Freire. “On the fertility side, we saw the government launch a new programme to subsidize up to 75% of the costs of IVF treatment for Singaporean couples. Unfortunately, this seems to be a symbolic move, meant to show that the government is trying everything to improve the fertility rate, and not an effective solution to the problem, as it is unlikely to have a meaningful effect.”

The government is also trying to tackle the pushback on immigration and occasional protest by limiting immigration to Singapore. “For instance, the Singaporean government is limiting the number of immigrants working in certain companies from 40% to 38% of their workforce in 2020.”

Clawing back

The survey nevertheless indicates that more emerging markets than not registered improvement in the fourth quarter – 80 countries becoming safer compared to 38 becoming riskier (the rest unchanged) – with one of the more notable being Russia.

Its comeback is down to various factors, according to Dmitry Izotov, a senior researcher at the economic research institute FEB RAS.

One is, of course, the higher price of oil, boosting oil company revenue and producing a surplus on the government’s nances. With greater exchange rate stability, personal incomes have increased, along with consumption.

Izotov also notes the improvement in government stability due to minimal changes in personnel and the decline in protest activity, and to bank stability arising from moves to address bad debt.

“From October last year banks have been required to calculate the level of debt burden for each client who wants to take on a consumer loan, which means obtaining a loan is more difficult. Moreover, the banks have no problems with liquidity, and do not need to attract deposits on a large scale.”

Panayotis Gavras, another Russian expert who is head of policy and strategy at Black Sea Trade and Development Bank, notes there are areas of vulnerability in terms of debt, excessive credit growth and non-performing loans, leaving Russia exposed in the event of an economic shock. But he points out that: “The government has been assiduous in keeping such key indicators under control and/or trending in the right direction for several years.
“The budget balance is positive, somewhere between 2-3% of GDP, public debt levels are in the order of 15% of GDP, of which less than half is external debt, and private external debt is also trending downward, in no small part due to government policies and incentives for Russian banks and rms.”

Other improvers

Kenya, Nigeria and the vast majority of sub-Saharan Africa borrowers, including rapidly expanding Ethiopia and even South Africa, were upgraded in the fourth quarter along with parts of the Caribbean, CIS and Eastern Europe, encompassing Bulgaria, Croatia, Hungary, Poland and Romania.

South Africa’s bounce was partly driven by improving currency stability with the rand strengthening towards year-end, as well as an improving political environment under president Cyril Ramaphosa compared to his predecessor.
Certain oil producers racked up gains, including Saudi Arabia.

In Asia, risk scores improved in China (a small bounce arising partly from tax and financial sector reforms), along with the Philippines, Thailand and Vietnam boasting solid growth prospects and benefiting from companies relocating from China to avoid punitive tariffs.

Crowd-sourcing approach to evaluating risk

Euromoney’s risk survey provides a responsive guide to changing perceptions of participating analysts in both the financial and non-financial sectors, focusing on a range of key economic, political and structural factors affecting investor returns.

The survey is conducted quarterly among several hundred economists and other risk experts, with the results compiled and aggregated along with a measure of capital access and sovereign debt statistics to provide total risk scores and rankings for 174 countries worldwide.

Interpreting the statistics is complicated by periodic improvements to Euromoney’s scoring methodology since the survey started in the early 1990s.

Implementing a new, enhanced scoring platform in the third quarter of 2019, for instance, has had a one-off impact on absolute scores, altering interpretation of the annual results, but not generally speaking the relative rankings, longer-term trends or latest quarterly changes.


The survey has a new top-rated sovereign with safe-haven Switzerland moving into first place ahead of Singapore, Norway, Denmark and Sweden making up the remainder of the top five.

Switzerland is not completely risk-free, as illustrated by recent tensions over a new framework agreement with the EU, resulting in both sides imposing stock market restrictions. It is also prone to periods of moribund GDP growth, including a sharp slowdown last year.

However, the current account surplus of 10% of GDP, fiscal budget in balance, low debt, substantial FX reserves and strong consensus-seeking political system endorse its credentials as a safe haven for investors

Otherwise, it was a mixed year for developed countries, including the US and Canada. Both were marked down heavily overall, though the US score showed some resilience in the fourth quarter.

Japan’s fortunes waned, with retail sales and industrial production nosediving as confidence dipped towards year-end.

In the eurozone, France, Germany and Italy were exposed to global trade frictions and political risk, including elections in Italy, instability in Germany’s ruling coalition and anti-reform demonstrations in Paris putting Macron’s government under pressure.

Although France received a late-year rally, mainly from better-than-expected economic numbers, independent risk expert Norbert Gaillard downgraded his government nances score slightly, stating: “The reform of the pension system should be implemented, but it will be costlier than expected. Therefore, I don’t see how the public debt-to-GDP ratio could stabilize well below 100% in the next two years.”

Another of Euromoney’s survey experts is M Nicolas Firzli, chair of the World Pensions Council (WPC) and Singapore Economic Forum (SEF), and advisory board member of the World Bank Global Infrastructure Facility.

He remarks upon the fact that the past seven weeks have been particularly cruel for the eurozone: “For the first time since 1991 (First Gulf War), Germany’s industrial heartland (auto industry and advanced machine-tools) is showing grave signs of conjunctural (short term) and structural (long term) weakness, with no hope in sight for the carmakers of Stuttgart and Wolfsburg.

“Making things worse, France is now embroiled in a botched ‘pension reform plan’ that saw the pension minister (and founding father of president Macron’s party) resign abruptly right before Christmas, and Marxist trade unions ground public transportation to a halt, with disastrous consequences for the French economy.”

However, it turned out to be a better year for the debt-ridden periphery, with upgraded scores for Cyprus, Ireland, Portugal and, notably, Greece after a new centre-right government was installed following victory for Kyriakos Mitsotakis’ New Democracy at the snap general election in July.

The government managed to pass its first budget with a minimum of fuss and has been granted some debt relief in return for implementing reforms.

Although Greece still ranks a lowly 86th in the global risk rankings, way below all other eurozone countries, nursing a huge debt burden, it saw its best economic performance in more than a decade last year with annual GDP growth rising above 2% in real terms during the second and third quarters.

Italy and Spain also registered late-year gains, responding to better-than-expected economic performance, fewer banking sector and debt concerns, and calmer political risks.

Caution abounds

Analysts nevertheless remain cautious on prospects for 2020. Apart from the risks affecting the US – including the elections in November, its relations with China and the evolving situation with Iran – Germany’s fortunes are ebbing.
Its manufacturing base is facing the double-whammy of trade tariffs and environmental regulations, and the political scene is more uncertain as tensions have increased between Angela Merkel’s conservatives and her more left-leaning social democratic partners under new leadership.

The UK situation remains perplexing too, despite the fact risk experts took stock of the general election result providing a strong majority for Boris Johnson’s Conservatives and removing legislative hurdles.

Many experts, including Norbert Gaillard, upgraded their scores for the UK’s government stability. “My rationale is that the British government was unstable and dependent on Northern Ireland’s Democratic Unionist Party during 2018-2019.

“Now, things are clearer, and although Brexit is negative, prime minister Boris Johnson has a big majority and his bargaining power will be greater than ever when he negotiates with the European Union.”

Analysts were nevertheless split between those who, like Gaillard, were more confident about the outlook gave the more decisive framework for achieving Brexit, and those eyeing the UK’s economic and scal picture cautiously in light of the government’s public spending plans and the prospect of a no-deal outcome should trade negotiations with the EU develop unfavourably.

However, Firzli believes that long-term asset owners from China – and also the US, Canada, Australia, Singapore and Abu Dhabi (the ‘pension superpowers’) – are willing to make renewed long-term bets on the UK, in spite of excessive public spending and Brexit-related scal risks in the short-medium term.

On the other hand, scally orthodox ‘core-eurozone’ jurisdictions like Germany, Luxembourg, the Netherlands and Denmark “may have a very hard time attracting long-term foreign investors in the coming months”.

For more information, go to: EUROMONEY for the latest on country risk.

By Jeremy Weltman