15/4/18: EuromoneyCountryRisk 1Q 2018 report

Euromoney Country Risk 1Q 2018 report (gated link) is out, quoting, amongst others, myself on geopolitical and macroeconomic headwinds to global economic growth:

Two interesting tables/charts:

My quote:

12/1/18: Euromoney Credit Risk Survey of 2017

Euromoney Country Risk survey for 2017 is out with comments from, amongst others, myself: (https://www.euromoneycountryrisk.com/Analysis/ECR-survey-results-2017-EMs-back-in-vogue-as-global-prospects-soar-?LS=Adestra64171_&utm_source=Adestra&utm_medium=email&utm_term=&utm_content=ECR%C2%A0%20Q4%202017%20Survey%20Results%20-%20Emerging%20markets%20back%20in%20vogue%20as%20global%20prospects%20soar&utm_campaign=ECR%20Weekly%20Round%20Up%2012%20Jan%202018)

28/10/16: Rising Risk Profile for Italy

Euromoney Country Risk on Italian referendum and rising risks relating to Euro area's third largest economy:

23/1/16: Poland's Sovereign Risk Troubles

With what appears to be a political-motivated downgrade by the S&P on January, from A to BBB+, with steady outlook, Poland’s sovereign and macro risks have been pushed to the top of news flow. Meanwhile, Moody’s rates Poland A2 (stable) and Fitch A. However, as noted by Euromoney country risk recent assessment, the sovereign risks turmoil that accelerated over the last few weeks has been building up for some time now.

Euromoney Country Risk (ECR) survey shows that by the end of 2015, Poland’s political risk score dropped to 20.06, “the lowest it has been since ECR launched an updated methodology in 2011”. More interestingly, “Poland’s political risk score has been declining – indicating increased risk – since 2011.”

Worse, per ECR: “the drop in Poland’s political score from 20.17 in September to 20.06 in December combined with a fall in its economic risk score from 19.38 to 19.27 over the same period, contributing to a decline in its overall score to 65.62 from 66.93. Poland, which enjoyed a ranking as the 29th safest country in the world in September, dropped four spots in rankings since the yearend survey.

Here is ECR’s summary of scores for Poland, including some recent moves:

It is interesting to see Poland significantly underperforming Slovakia:

Overall, given that both Slovakia and Hungary have, over recent years, adopted a series of reforms that severely undercut effectiveness of institutional checks and balances over the power of the executive, the reaction of ratings agencies and European authorities to Poland following the same route suggests growing concern and nervousness in Europe over all and any national experimentation with populist and/or non-conformist (to EU 'standards') policies.

Not being a fan of the current Polish leadership, I find myself in Poland's corner: in a democratic setting, it is people, not Eurocrats, who should decide on their future institutions.

14/5/15: Expert Insight: Q1 results: Estonia

My contribution (and others') to economic outlook analysis for Estonia, via Euromoney Country Risk http://www.euromoneycountryrisk.com/Analysis/Expert-insight-%E2%80%93-Q1-results-Estonia

Here are the jpgs of the article:

14/11/2014: Russia Risks Up, but No Panic, yet

Euromoney Country Risk published an interesting analysis of the country risk scores for Russia. Here are some of the highlights (link up once Euromoney produce undated note).


"As sanctions and falling oil prices force the rouble’s slide, country risk experts are questioning the ability of privately owned and/or state backed
banks and corporates to obtain credit and repay their debts amid capital flight and an economy in decline Russia’s country risk score has fallen precipitously this year, in tandem with Ukraine."

The beef is in the details: "An 8.3 point correction since 2013, to 46.2 points out of a maximum 100 available, has sent the sovereign careering 17 places down ECR’s global rankings to 71st out of 189 countries worldwide. That marks a lower score compared with 2008, indeed the lowest since Russia defaulted in 1998, with the sovereign slipping into the fourth of ECR’s five tiered groups commensurate with a B to BB+ credit rating, signalling its triple-B credit ratings are overdue a downgrade."

Per ECR: "Russia’s plight is understandable. Oil prices have come off their peak since June, falling more than $30 per barrel to $81, as of Thursday."

You bet. Here's the updated chart:

As I noted before, oil price leads Ruble, not the other way around. And also note volatility in recent days - as predicted here: http://trueeconomics.blogspot.ie/2014/11/7112014-russian-ruble-rough-days-ahead.html

Back to ECR analysis: "With sanctions causing an estimated $130 billion of capital outflow this year, according to the central bank, the rouble has plunged to $46/$, depreciating by 42% since the end of 2013 and forcing an abandonment of its target corridor in favour of a (virtual) free float absorbing the shock and preventing forex decline."

The point worth mentioning here is that capital outflows recorded are official flows, which include:

1. Repayment of maturing debts by Russian banks and corporates (which is now becoming a serious issue, given the state of debt markets in the wake of the sanctions); and
2. Forex positions taken by households and corporates, even when deposits are held inside the country.
3. In addition, capital outflows reflect exits by financial investment funds, which are not having a direct impact on the economy in the short run, but can have adverse impact on corporate funding and investment forward over the longer term.

For the repayments schedule, see here: http://trueeconomics.blogspot.ie/2014/11/11112014-another-wild-ride-for.html

Experts opinion

"Russia’s FX reserves totalled $429 billion as of end-October, down from $524 billion the year before. The true total is a little lower due to adjustments for the reduced valuation of gold reserves and changes in official agency reserves."

Note, I wrote about the latest foreign reserves position figures here: http://trueeconomics.blogspot.ie/2014/11/11112014-another-wild-ride-for.html these stood at USD416.23 billion at the end of October, excluding IMF-held funds, SDRs, and covering only gold and foreign exchange.

Danske Bank analysts "believe the $50 billion FX repo facility is “reasonable
enough to cover the most urgent needs of Russian corporations regarding their external debt repayments” through to 2016. Some banks, after all, have surplus liquidity that can be redistributed to those in need, and the central bank’s forex stockpile is sufficient to imbue some confidence in averting a crisis."

Kaan Nazli, senior economist at Neuberger Berman "expects a turnaround next year “due to the currency devaluation effect, and as private sector debts are
paid down with refinancing options limited by the sanctions.”

My own comment quoted in ECR note is as follows: I do "not believe a sovereign or even selective (large scale) private sector defaults are likely in the short term in spite of some talk of difficulties. “Such an event is not in the interest of the Russian authorities and can be prevented by using the existent foreign exchange reserves cushion,” he says. However, if oil prices remain low for a prolonged period and, simultaneously, Russian companies’ and banks’ access to foreign funding is severely curtailed, “we are likely to see a significant uplift in sovereign and banks’ credit risk”, he adds."


My 'wider angle' view to add to the above comment is as follows:

In my opinion, Russian Ruble dynamics vis-a-vis the USD and EUR are underlining the overall structural and geopolitical pressures on the Russian economy.

Amongst the structural factors, the largest weight can be assigned to the developing risks to economic growth, that have been at play since H2 2012 and H1 2013.

However, additional pressures are now being presented by the geopolitical factors, namely the crisis in Ukraine and the related sanctions on Russian companies and banks, including the indirect effects of these sanctions.

Decline in the oil prices - triggered in part by the sluggish global demand, and in part by the geopolitical decisions of the Gulf countries to withdraw supply-side support for oil - a having a significant short term impact on Russian exports revenues and are driving down Ruble valuations. Financial sector sanctions have de facto cut off all Russian companies and banks (including those not explicitly covered by sanctions) from the largest foreign funding markets, triggering high outflows of capital (as Russian companies pay down their maturing foreign currency loans exposures instead of rolling them over). As the result, Russian international reserves have been depleted from USD524.3 billion at the end of October 2013 to USD428.6 billion at the end of October 2014 (although one must take into the account reductions in this figure due to lower valuation of gold reserves and changes in official agencies reserves).

Going forward, changes in the inflationary environment, global and Russian economies dynamics, as well as continued demand for corporate and banks' deleveraging from foreign debt exposures, we can expect more downward momentum in the Ruble valuations and more pressure on the Government fiscal position.

However, devaluation of the Ruble and decline in oil prices do not have a linear one-to-one effect on sustainability of Federal fiscal balance sheet, as Government expenditure is denominate in Rubles, not US dollars or Euro. Furthermore, decline in oil prices is also not translating in one-for-one decline in Russian external balances, as Russian economy is capable of very quick and deep correction in imports demands, as 2009 experience clearly indicates.

As the result, in the short- and medium-term (up to 18-24 months), I do not foresee a significant acceleration in the risk of either a Federal or selective (large scale) private sector defaults. However, if WTI price stays for a prolonged period of time (2+ years) below USD95/barrel and, simultaneously, Russian companies' and banks' access to foreign funding remain severely curtailed, we are likely to see a significant uplift in sovereign and banks' credit risk.

Risk of selective (bank of corporate) default event is harder to asses than sovereign risks, but I do not expect - at this point in time - a large-scale event involving any big Russian corporates. Such an event is not in the interest of the Russian authorities and can be prevented by using the existent foreign exchange reserves cushion. The material risk here is that a number of larger Russian banks and companies, impacted severely by the sanctions, are likely to see dilution of the current shareholdings of foreign and domestic investors, as any liquidity support from the Government will likely see issuance of new equity to the state.

23/10/2014: Euromoney Country Risk survey results Q3 2014

Euromoney Country Risk survey for Q3 2014 is out:
http://www.euromoney.com/Article/3392195/Euromoney-Country-Risk-survey-results-Q3-2014-Looming-China-crisis-adds-to-eurozone-and-emerging.html

Euro area risks are down, but starting to regain upward momentum in recent weeks. Meanwhile, BRICS are struggling, Russia risks deteriorating and overall global environment is not encouraging.

9/9/2014: Russia's Risks are Up, but Still Vastly Outperforming Ukraine's

Earlier today I tweeted about the drop in the drop in the credit risk score for Russia in the Euromoney Country Risk survey. As always, one has to look at the scores in both time series context and comparative to the peer economies.

Here is the Russian score in time series context:

It is worth noting that Russian score has declines rather steadily over time, but remains well ahead the regional average for the Eastern and Central Europe. Part of Russian score decline is driven by the ECE trend, but part is idiosyncratic.

Here are the main components of the score and the direction:

The sea of read arrows is what is of greater concern - scores dropping across all categories surveyed except one: debt indicators.

For comparative, the chart below shows evolution of Ukraine score, which is much less benign than that of Russia and remains deep under-performer in the Eastern and Central Europe:

Table below (click to enlarge) shows cross-countries comparatives for score and main components for Russia's main non-EU neighbours:

At the bottom of the above table, I list countries that are in 'credit risk' proximity to Russia, Ukraine, Belarus and Moldova. One thing is clear: Russia is comparing favourably to Eastern European countries that are EU members. Ukraine, Belarus and Moldova - do not. Their proximates are least-developed countries of the region.

24/6/2014: ECR Ukraine Risk Assessment

Ukraine keeps diving deeper and deeper into the economic crisis territory (via ECR):

So per above, the country is now in the lowest ranking tier in terms of risks. And it is significantly underperforming its peers:

Risks scores composition is abysmal on Political and Economic Assessments (none have much to do directly with the external threats and all are already pricing in any positives from the latest Presidential elections):

16/5/2014: Summary of euro area 'peripherals' risk ratings

A neat summary of sovereign risk ratings by the majors and Euromoney Credit Risk:

Rankings on the left reflect country position in risk league tables per ECR (lower rank, better performance) and in the brackets give changes on ranks since 2013 (so, for example, Ireland improved its risk position by 5 places to 38th out of 186 countries covered by ECR). ECR score is a risk score (higher score, lower risk) and ECR tier is a tier of risk that groups of countries cluster into (lower tier, closer the tier to top performing lowest risk countries).

The lesson, probably, is:

• Greece is due no upgrades
• Cyprus is due no upgrades
• Portugal is due an upgrade on Fitch to BBB+, Moody's to Baa2 or Baa3; and S&P to BBB
• Italy is due no upgrades
• Spain is due no upgrades
• Ireland is due no upgrades post Baa3 upgraded to Baa1 (+positive outlook) by Moody's today

One way or the other, things are starting to move more positively on ECR scores side, but ratings agencies are still lagging. But that is not new - exactly the same lags took place on the downside of trade back in 2008-2012.

18/1/2014: Ireland's Credit Upgrade: Some Background

Moody's upgraded Irish sovereign debt ratings last night. My analysis is here: http://trueeconomics.blogspot.ie/2014/01/1812014-moodys-upgrade-for-ireland.html

Couple additional of points in relation to the upgrade.

Here's the current Western Europe league table in the Euromoney Country Risk Survey, placing Ireland at the top of the peripherals:

This is a consensus view across ECR group of economists and analysts and the core downward risk source for the ratings is Economic Assessment. Ratings upgrade will most likely translate into a higher score on Credit Rating, pushing us closer to France into the 2nd tier.

The upgrade was predictable and overdue. Two weeks ago I run the analysis of CDS spreads over 2012-2013 period (here: http://trueeconomics.blogspot.ie/2014/01/512013-euro-periphery-in-cds-markets.html) and the core conclusion relevant to today's news is in the last bullet point of the post.

• Irish CDS since the beginning of 2012 are carrying heavier weighting on probability of default estimates: in the last two charts, our CPD is priced along the mid envelope of (CDS, CPD) quotes, while Greece implies underpricing of the probability of default (along the lower envelope). Our probability of default is slightly over-estimated compared to Portugal and Spain, but is in line with Italy. This potentially relates to the point raised above in relation to speed of our CPD declines over 2013: we might be experiencing an over-due repricing (very slight) in the relationship between the CDS levels and implied estimates of the probability of default.

In other words, the CDS pricing was signalling lower probability of default for Ireland. And it was predictable on the basis of core fundamentals as well. Here's from the post back in March 2013:
http://trueeconomics.blogspot.ie/2013/03/1532013-irish-banks-still-second.html "my view is that we are due an upgrade, but a single notch one, to reflect economic decoupling from the peripherals".

So to reiterate: the upgrade was

1. Overdue
2. Expected
3. About right on the side of the change in the rating
4. A good net positive on expected markets impact, and
5. Enhancing stability of our debt, with medium-term expectation for lower borrowing costs (this will not play out right away, as Ireland's debt maturity profile is long-dated).

Meanwhile, this week's Euromoney ECR note on FY2013 credit risks shows continued drag on ratings in the euro area:

The full analysis (restricted access) is here. My quote on the above is about the general sense of complacency at the euro area 'leadership' level:

My full comment given to ECR on the 2013 results is here:

Euro area:

Euro area remained the weakest economic region globally, over the entire 2013, with a number of countries struggling with high unemployment, recessionary macroeconomic conditions, extremely low and near-deflationary price pressures and operating in the monetary environment still characterised by anaemic growth in money supply and tight credit markets. Based on the latest data, euro area is the only region world wide that is expected to post negative real GDP growth in 2013. 

The fact that this abysmal performance comes alongside relatively benign output gap, compared to other regions, and amidst overall improved global economic outlook, signals structural nature of the Great Recession in the euro area. In addition to the weak macroeconomic performance, euro area continued to suffer from acute leadership deficit - a fact that did not go unnoticed by the analysts. 

In 2013, eurozone's leadership effectively shifted from the risk-management mode that underpinned relatively rapid and robust rhetorical responses to the crisis in 2012, to a navel-gazing mode. Few of the policy proposals tabled over 2012 in response to the sovereign debt and banking sector crises were implemented or fully structured in 2013. The monetary policy, while remaining  relatively accommodative, continued to deploy the very same measures used in previous years, with little improvement in the credit supply conditions on the ground, at the level of the real economy. Thus, monetary growth was subdued and retail interest rates margins over the policy rate continued to rise, making credit to euro area enterprises and households both less available and more expensive.

Sub-regional:

The focal point of the euro area adverse news flow over 2013 has shifted from the so-called PIIGS to the relative newcomers to the crisis-stricken periphery: Cyprus and Slovenia. With Cyprus' depositors bail-ins setting a new benchmark for private sector burden sharing that will serve as a template for the euro area future crisis resolution measures, Slovenia has been desperately attempting to avoid a formal Troika bailout of its weak banking system. As the result, the country saw significant deterioration in macroeconomic environment over 2013. 

In the second half of 2013, with growth starting to return to core euro area economies, the centre of gravity in the Great Recession moved to economically weak Italy and France and away from the recovery-bound Ireland and Spain. In fact, 2013 macroeconomic and fiscal performance by the former warrants significant improvements in its credit scores, while the latter is starting to gain ground in terms of stabilising external trading conditions, while lagging on fiscal side. The expectation, therefore, is for continued decoupling of Ireland from the weaker peripherals sub-group as signalled by the CDS spreads and bond yields to-date.

Overall, Italy remains the weakest large euro area economy, member of the Big 4 countries of the eurozone, with virtually no growth and no reforms compounded by the risk of renewed political instability. Current expectation is for the real GDP contraction of 1.8% in 2013 following a 2.37% decline in 2012. Italy is also the only large euro area economy that is expected to post a fall in overall exports of goods and services in 2013 and, along side Spain, reduction in levels of employment across the economy. As the result of its poor growth performance, Italy is likely to post the only increase in the net government deficit for 2013 of all big euro area states, leading to an increase in the country debt/GDP ratio to 132.3%. The key to the country deteriorating credit risk scores, however, rests with the general markets perception that Italian political leadership remains incapable to deliver any meaningful structural reforms. 

Meanwhile, France is showing all the signs of deepening deterioration in manufacturing and core services activity since the onset of Q4 2013. French economy is currently once again on the edge of another recessionary dip and unemployment is poised to post further increases in Q4 2013-Q1 2014. At the same time, like Italy, French leadership appears to be stuck in 'neutral' when it comes to fiscal and structural reforms - a situation that is likely to spillover into a twin crisis of anaemic growth conditions and renewed industrial unrest in early 2014 (in 2013, French unemployment rate exceeded that recorded in Italy in 2012). With nearly zero structural adjustment underway, France's current account remains in deficit (-1.6% of GDP in 2013), while general government gross debt is now at around 93.5% of GDP, up on 90.2% in 2012, and heading higher in 2014. France also has second largest primary deficit of all larger euro area economies, as well as overall Government deficit that is in excess of that recorded in Italy. With public and household finances in tatters, France is likely to finish 2013 with lowest end-of-year inflation of all big euro area economies, pushing the country closer to deflation.

18/12/2013: Ireland's risk ratings improve: ECR

Euromoney Country Risk score for Ireland posted one of the largest increase of all countries surveyed in recent weeks. Here are the details:

Details of Ireland score upgrade:

 Note: ignore the glitch in data prior to June 2013.

Sub-factors of the Economic Assessment, Political Assessment and Structural Assessment scores:

15/11/2013: Ireland: Some Credit Risk Analytics

Just as I covered some of my thoughts on Irish exit from the bailout (http://trueeconomics.blogspot.ie/2013/11/15112013-exiting-bailout-alone-goods.html), the Euromoney Country Risk group published a neat summary of risk ratings for Euro area sovereigns. Here it is:

Ireland is still in a relatively weak position - not as bad as the 'periphery', but not as good as we should be...

And with a bit more granularity:

11/10/2013: Euromoney Credit Risk Analysis: Q3 2013

The Euromoney Country Risk survey results are out for Q3 2013 and here is some analysis with a comment from yours truly. As usual, emphasis is mine:

"Some 101 of the 186 countries surveyed have succumbed to lower ECR scores (increased risk) since June, which, with 17 unchanged, leaves just 68 safer, according to the views of global economists and other country-risk experts surveyed during the third quarter."

Core global drivers:

• US federal shutdown & looming debt-ceiling deadline 
• Concerns about monetary tapering, and 
• Europe’s fiscal problems.

"... the shake-out that occurred in the wake of the collapse of Lehman Brothers in September 2008 has still left the majority of sovereigns – some 75% in all – with vastly increased risk levels than before the crisis; in the case of the eurozone periphery - Cyprus, Greece, Ireland, Italy, Portugal and Spain – an astonishing 25 to 50 points each."

Notice that in the above, Euro area shows the highest rate of deterioration of any region, save the CIS, and CIS deterioration is in part driven by links to the Euro area.

Per ECR: "US causing fewer flutters for G10 risk profile than Europe’s problems."

"Within the G10 group of leading industrialized nations, the US is not considered a particularly riskier prospect in spite of its latest political troubles. The world’s biggest economy has slipped to 17th in the rankings, but its score is still higher than at the start of the year."

In the case of Europe, core downward pressure drivers are:

• "The unwillingness to see the euro weaken", 
• "A banking sector still in need of repair",
• "Weak political resolve on budget issues"and 
• "Individual country economic prospects heading in different directions.”

Per ECR: "Indeed, greater concerns are reserved for 21st-placed France, with its fiscal targets missed and the economy remaining sluggish, as well as for Aaa-rated Sweden, in fifth spot, where a moribund economy and a government relaxing fiscal policy with tax cuts ahead of next year’s parliamentary election are gnawing away at the sovereign’s gold-plated creditworthiness."

"Both countries have seen their scores slip the most (by 0.7 points each since June), within a group where Germany is flat-lining as it awaits the formation of a new government..."

"In the European Union, 17 of its now 28 member states are riskier, whether compared with June or since the end of last year..."

"Remarkably, in spite of the recoveries witnessed in some of the bailout countries, notably Ireland and Portugal, the eurozone crisis is continuing to cause ripples, with no fewer than 10 of the 17 member states still succumbing to lower scores during Q3. This comes amid weak economies, excessively high unemployment rates, spikes in political risk, trade-weighted appreciation of the euro, and Greek borrowing concerns re-emerging to keep the region’s worst performer grounded on 34 points."

Notice Ireland's strong position second to Austria in terms of overall gains in the risk scores (lower risk).

"Constantin Gurdgiev, another ECR contributor, based in Dublin, says: “The changes in risk assessments broadly reflect improved sentiment across the euro area, consistent with both improved global growth outlook and internal regional stabilization in the wake of protracted sovereign debt and growth crises.

“[However] structural weaknesses and risks remain, with France presenting significant long-term risk due to the complete absence of serious efforts to reform the labour markets and address a chronic lack of investment in new enterprises formation.

“The US debt-ceiling uncertainty also presents a lower risk to the euro area economies than the longer-term upward pressure on US yields. As benchmark yields for the US and Germany deteriorate into 2014, there will be renewed pressure on funding excessive debt levels across the majority of the euro area economies, most notably for Greece, Italy, Portugal, Spain and Ireland, but also for Belgium and the Netherlands.”"

Apologies for shameless self-promotion... :-)

5/10/2013: Euromoney Country Risk: Italy v Spain

Euromoney Country Risk scores changes:

Notice-worthy:

• Improved score for Hungary driven by gains in Economic Assessment, Political Assessment and Structural Assessment
• Cyprus scores continue to deteriorate despite the claims from the Troika that the economy is close to 'stabilising'. Cyprus risk metrics are tanking at a rapid rate from 58.0 in March post-default rating to 52.1 only 6 months later.
• Spain is rated below Italy, but the two counter-moved in recent ratings, with scores differntials driven by the following:

The political cycle clearly disfavours Italy, but economic performance is on Italy's side.

Here's ECR's analysis on Italy v Spain, with comment from myself (you can click on slides to enlarge):