Country Risk Ratings Q1 ‘16: The 10 Ups And Downs

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Gather your commercial and risk assessment teams, open your tablets and notepads, and stay tuned. It is time, once more, for the quarterly country risk analysis.
Every three months, Euler Hermes’s Economic Research Department performs a deep drill into a batch of

May the Four be with You
As for the changes this quarter and accompanying reports, here are 4 countries with upgraded ratings:
Argentina was upgraded from D4 to C4: Change is not always only a matter of appearances. Mauricio Macri’s new government leads the country on a long, winding and possibly painful road in the short-term (the adjustment will be long) – but at its end awaits the promise of recovery. A 5-step strategy to get the economy back on its feet includes the easing of capital controls, a return to global capital markets and a resolution of negotiations with Argentina’s ‘holdout’ creditors, meeting external commitments, setting responsible economic policies with fiscal and inflation targets and the establishment of credible economic statistics. Interestingly, while Argentina claws its way back up from a hole, its neighbor Brazil – reviewed below – is heading in the other, wrong direction.
Good news for Greece, which was upgraded from C4 to C3. Why? Because after four major Greek banks were recapitalized in 2015 deposits stabilized and some capital control measures were eased.  Improved growth prospects should affect H2 2016 thanks to a further easing of capital controls and debt sustainability measures from the Troika - a tripartite committee formed by the European Commission, the European Central Bank and the International Monetary Fund, provided the ongoing Troika review reaches a positive outcome.
Croatia moved one notch up from C4 to C3. After six consecutive years of annual GDP contraction, its economy returned to growth in 2015, thanks to a moderate recovery in domestic demand. Euler Hermes expects the recovery to gradually gain momentum, resulting in growth of about +1.8% in this year and +2% in 2017. It will however remain well below its 2008 peak. The key going forward: improved economic policies.
The Dominican Republic also progressed in a positive direction: its Country Risk Rating is up from C2 to B2. While growth slowed it remains solid and the 2016 forecast stands at a healthy +4% GDP growth. Macroeconomic fundamentals have been strengthened over the last years, with an improving the business environment, stronger fiscal accounts and lower external vulnerability.

Sad Six-Pack
And now to the less savory and more risky side of the analysis: 6 countries’ risk ratings have been downgraded.
Four of these are Asian economies impacted by lower global trade and more importantly by China’s readjustment from manufacturing to services and related slowdown. It turns out that a slower Chinese pace can push even advanced economies into tricky territory, and cause a hike in insolvencies. This translates into heightened short term risk in Singapore, Hong Kong, Taiwan and Macao. While all were downgraded to Country Risk Level 2, tiny Macao’s Country Grade was also downgraded from A to BB. The three service hubs – Singapore, Hong Kong and Taiwan – were spared deterioration in their medium term prospects.
Also downgraded: beaten, bruised and much-beloved Brazil.  Much has been said about the country’s lately political woes and economic deterioration. The deep recession, with GDP forecasted to fall another -3.5% this year, above-target inflation (+8.5% in 2015), and skyrocketing insolvencies (+22%, 2016 forecast) is compounded by the political upheaval. One of the more controversial moves by the embattled leader Rousseff was the replacement of the country’s finance minister.
Last but not least the paling rainbow economy – South Africa. Under its current political and economic leadership the country ventured down a path that leads to inflation, twin deficits and  capital outflows. The latter are likely to be exacerbated if international rating agencies impose further downgrades.
So, another three turbulent months have gone by. Granted, the economic world is still turning on its axis. But the machine is making some awkward sounds, as we will see in the next post – about the updated (and quite dramatic) Sector Risks.


Ludovic Subran

Chief Economist

Euler Hermes

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