Risk Ratings Q3 2017: The Seesaw Effect

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There’s quite a lot being said and done about risk. It is dissected, analyzed, visualized, debated, and – more often then we care to admit – used as a tool to wield control. 

One thing that risk taking does not reward is ignorance. So we dig deep, and we do it every three months when Euler Hermes’s Economic Research Department investigates a batch of important countries worldwide. 

The team of addresses a key question: which countries perform well on reducing non-payment risk by companies – and who flunk the test. At the end of Q3 2017, we published a new batch of 18 country reports, out of 97 we make available online. We also updated our country risk map and risk ratings for 7 countries, with five upgrades and two downgrades this quarter. 

These are useful signals for any business, whether on the hunt for opportunity or seek cover.  For those curious about methodology, a brief introduction to our innovative model can be found at the bottom of this post. For the rest: here are the upgrades and downgrades, accompanied by commentary from our seasoned economists.

Overall in 2017, country risk has reversed its trend in 2017. Now, it's clearly improving thanks to reduced macroeconomic imbalances or higher current account surpluses and foreign exchange (FX) reserves in many countries.


DESPITE TURBULENT POLITICS THE PHILIPPINES DEFIES EXEPCTATIONS (B2 RATING => B1)

The economy is performing well despite investor’s worries following President Rodrigo Duterte’s election in 2016. The Philippines will rank among the top performers in the region in 2017. Strong growth - above +6% - is buoyed by solid domestic demand and an improvement in exports. Moderate inflation, robust remittances inflows and solid job creation support a rise in private consumption. Private investment benefits from robust growth in credit and a rise in new orders. Public expenditures growth remains strong albeit at a slower pace due to base effects related to the 2016 election. Exports are improving due to higher demand from major economies. In the longer term, GDP growth should remain strong. A weaker Philippine Peso and improved global demand will contribute to steady exports performance. Domestic demand growth will remain firm on the back of supportive monetary and fiscal policies. Investment growth will remain the main driver, followed by private consumption. Risks relate to domestic political developments. Further controversial statements and actions by President Duterte could hinder investor sentiment. At the same time, slower growth in global demand could halt the current exports improvement.

The upturn led Euler Hermes to raise the Philippine’s country risk rating from B2 to B1, meaning “low” over a 12-month horizon.


INDONESIA BOUNCES BACK (B2 => B1)

After reaching a low point in 2015 (+4.9% GDP growth) the economy bounced back, supported by strong domestic demand growth. Looking ahead, EH expects +5.1% growth in 2017 and +5.2% in 2018. The outlook for exports has improved thanks to higher demand from major economies, and a gradual recovery of commodity prices. Macro-policies are becoming more supportive as key structural imbalances, namely a large current account deficit and a high level of inflation, have been reduced. Improved business sentiment, favorable credit conditions and rising new exports orders suggest a gradual rise in investment. Private consumption growth is set to remain firm. It is supported by a dynamic labor market and a combination of high wages growth and moderate inflation.

These factors underpinned Euler Hermes’ upgrade of Indonesia’s country risk rating from B2 to B1 – improving to “low” from “medium” over a 12-month horizon.


THAILAND PICKING UP SPEED (B2 => B1)

Growth is set to rise by +3.8% in 2017 and +3.5% in 2018. This is above the 2016 rate (+3.2%) and the average +3% recorded in 2013-2015. The first half of 2017 has been strong with expansion supported by higher exports and solid growth in domestic demand. Exports are set to remain firm due to higher demand from the US, China and the Eurozone. Domestic demand growth is also expected to rise. Public expenditures growth will remain strong. This is due to higher public investment in key infrastructure projects. Private consumption growth should benefit from low inflation and higher household income. Private investment growth should edge up due to higher new orders and favorable financing conditions. 

We see three risks going forward: First, uncertainties about the next general elections could limit growth momentum through lower private investment. Second, political conditions in major markets (e.g. US protectionist measures) and geopolitical tensions in the Korean peninsula could hinder trade flows. Third, slower-than-expected economic growth in the US or China could act as a drag on Thai exports.

Euler Hermes upgrades Thailand’s country risk rating from B2 to B1, and from “medium” to “low” over a 12-month horizon.

“Overall, growth surprised on the upside in Asia. It triggers our 3 country rating upgrade in Philippines, Indonesia and Thailand. Growth has proved resilient in the region during China’s rebalancing. Moreover, the broad recovery of global trade is particularly benefitting to these economies (good exports increased by 5.2% y/y in volume in H1)”, says Mahamoud Islam, Senior Economist at Euler Hermes.


EGYPT’S  REFORMS PAY OFF (D3 => C3)

Egypt implemented significant reforms in November 2016. These are aimed at switching from a rigid model with a fixed exchange rate, high subsidies, and capital controls to a more market-based one. The trigger for this change was low liquidity and the need for financing from the International Monetary Fund. As the Egyptian government accepted the IMF’s conditions, the country made a quick comeback to financial markets. Still, short-term costs are heavy, resulting in high inflation (+30% in 2017). Yet this price shock is helping to rebalance the economy by making imports costlier. This ongoing rebalancing is a pre-condition to make the most of the country’s business environment, which is one of the most favorable in the region.

Egypt benefits from a growing interest from foreign investors. Financing is no longer an issue, as FDI investment increased (capital investment announced in 2016 reached USD 40 bn, according to FDI Intelligence). As growth should hold the line in 2017 (+4%) and accelerate incrementally in 2018 (+4.5%), prospects for the Egyptian economy are currently brightening, according to Stéphane Colliac, Senior Economist at Euler Hermes.

Euler Hermes therefore upgraded Egypt’s country risk rating from D3 to C3, signaling improved medium-term risk prospects.


PARAGUAY: LOVE THY NEIGHBORS (C3 => C2)

Paraguay is one of the poorest and most unequal economies of South America. 22.2% of the population lives below the national poverty line according to the World Bank. The World Economic Forum competitiveness index ranks it 118th out of 140 in terms of quality of infrastructure. Paraguay’s structural vulnerabilities stem from a reliance on the agriculture sector. Hence it is exposed to commodity-price shocks and weather conditions. Yet GDP growth has been dynamic and above the regional average since 2013, driven by domestic demand in a still challenging external environment in 2015-16. Growth should stay robust, reaching +3.6% in 2017 after a good soy harvest, and +4.0% in 2018, with the recovery of Brazil and Argentina (accounting for 40% of trade with Paraguay). Banks, while exposed to the agricultural sector, are well capitalized. 

Growth surprised on the upside in Paraguay as the commodity price shock had a smaller impact than previously thought. Moreover, since exports are currently on the recovery mode, growth has even more reasons to stick its broad stability (+4% in 2018).

Thus, Euler Hermes upgraded Paraguay’s country risk rating from C3 to C2 – meaning short term risk has improved from “sensitive” to “low”.


SAUDI ARABIA: SLIPPERY OIL SLOPE (BB1 => BB2)

Real GDP growth dropped to +1.7% in 2016 from 4.1% in 2015, triggered by markedly lower oil prices (benchmark Brent was USD45/bbl on average, down from USD53/bbl in 2015) and a reduction in oil production which was mainly due to lower external demand. Moreover,  the November 2016 OPEC agreement to cut output (in which Saudi Arabia pledged a cutback to 10.06mn bpd) caused GDP to contract by -0.5% y/y in Q1 2017. Furthermore , as oil revenues fell, the government implemented some fiscal consolidation measures. Nonetheless, the fiscal deficit remained a hefty -15.5% of GDP and public debt surged to 14% of GDP in 2016 (from just 5% in 2015) although this is still very low compared to most regional and global peers. Meanwhile, inflation entered negative territory in January 2017 (-0.4% y/y) and deflation has continued through August (-0.1% y/y), despite new cuts in subsidies earlier this year. 

2017 shapes up to be another low growth year, but the slight uptrend in oil prices and 

the reversal of earlier cuts in civil service bonuses in April 2017 in order to revive private consumption should mitigate the harm. 

“Nontheless, we have revised down our forecast for full-year GDP growth to +0.5% in 2017, followed by +2% in 2018”, says Manfred Stamer, Senior Economist here at the Economic Research department.

While the authorities pledge to take action in the long run with a National Transportation Plan 2020 and the Vision 3030 roadmap, Euler Hermes downgrades the short term risk over the next 12 months form “low” to “medium” (BB1 to BB2).


CONGO REPUBLIC​: RESOURCES CURSE AND HIDDEN DEBT (D3 => D4)

The Republic of Congo is still affected by the oil price slump. The country is saddled with a heavy debt burden, the result of an effort to secure oil exports and allow a high level of public spending ahead of July 2017 legislative elections despite the impact of low oil prices on fiscal revenues. Debt and deficits skyrocketed. The current account deficit plunged to -43% of GDP and the fiscal balance tumbled to -18.6% in 2015. An IMF mission revealed hidden public debt contributing to send the figure up from 38% of GDP in 2013 to 117% in 2017. As the current account deficit is still quite high, the country will need fresh financing. The local economy is exposed to financing shortages and runs the risk of a ‘sudden stop’ and a sharp recession.

“Congo Republic saw its public debt level increasing very fast during the last years, and some of this debt was hidden. It sent the public debt to GDP ratio to 117%. Lack of data transparency and very poor management of the protracted period of low oil prices are clear rationale to downgrade Congo Rep from D3 to D4”, says Stéphane Colliac.

Euler Hermes downgraded Congo Republic’s risk rating from D3 to D4 (from “sensitive” short term risk to “high”). 


COUNTRY RISK RATING METHODOLOGY

Evaluation of the overall level of country risk is based on a structural Country Grade, which measures transfer, convertibility, confiscation and expropriation risk, and the quality of the business climate (six grades from AA to D); and a Short-Term Alerts Indicator (scale of 1 to 4).


The structural Country Grade combines assessments of:

1. Macroeconomic imbalances

2. The business environment 

3. Political system stability and the effectiveness of government (political risk).


The Short-term Alerts Indicator measures: 

1. The business cycle

2. The country’s financing risk.


The country risk map is available to download, view or share at this link




Ludovic Subran 

Chief Economist 

Euler Hermes 

If you would like to learn more about Euler Hermes in your country or near you, feel free to visit our countries’ pages​.




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