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ASIA
Risks in Asia have remained largely stable, but the sources of those risks are varied. We have seen a minor rise in political violence risk in India, Indonesia and Sri Lanka. At the same time, localised terrorism and human rights violations in some countries remain a threat to security and may mean higher insurance costs for businesses. The only improvement in the region comes from Kyrgyzstan, which saw a reduction in its risk of supply chain disruption.
While overall growth prospects are still positive, the region faces global and domestic headwinds that could potentially increase the overall risk of several economies. Falling business confidence amid US–China trade tensions and a China deceleration are increasing concerns, in particular for open economies such as Thailand, South Korea and Taiwan, as well as for China itself. Further, if commodity prices rise faster than expected, oil importers such as India and the Philippines are also at risk due to their relatively weak current account balances.
We expect government policies to remain generally stable in the region. The election season is starting to heat up—Indonesia and India are scheduled to hold elections in 2019, while Thailand and the Philippines are expected to do so as well. This may lead to some added fiscal policy support in these countries, as governments rush to implement already- promised policies before the elections. Malaysia’s new government may be an example of post- election development in the region—it is now attempting to implement the populist policies it promised during its election.
ASEAN countries stand to gain from the ongoing trend of relocating low-cost manufacturing industries and redirecting US imports from China. This will likely outweigh any adverse impact on ASEAN exports to China.
In South and Southeast Asia, we see high levels of security and political violence risk due to ethnic and religious frictions, which has resulted in tensions between various groups in many countries such as Pakistan, India, Myanmar and Philippines. This quarter, we saw small upswings in political violence in India, Indonesia and Sri Lanka.
Human rights are also at risk in certain Asian countries. In the Philippines, President Rodrigo Duterte has maintained his hard-line stance on the drug trade and rebels, keeping political risks very high. Political violence also remains very high in Myanmar and Cambodia.
On the other hand, we see some countries successfully pushing through reforms, such as India and Sri Lanka, while Pakistan’s prime minister has vowed to reform the country’s economy and political institutions. Regulatory changes in these countries could have implications for tax rates, trade and exchange transfer risk, and if successfully implemented, could lower business operating risks in the long-term. Some Asian frontier markets like Mongolia, Vietnam and Sri Lanka are introducing banking sector reforms that are meant to improve weak regulatory frameworks and shore up banks’ capital buffers. However, this might hamper growth and profitability for banks in the short-term.
Concerns around China’s stability persist, as leverage risks are increasing. However, we expect domestic fundamentals to remain resilient in the near-term. The uncertainty from trade tensions and fears of an economic slowdown have prompted Chinese authorities to loosen both fiscal and monetary policy.
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EASTERN EUROPE AND CIS
The region remains largely stable as no country in the region experienced a change in its overall risk score this quarter. Overall, the economic outlook remains positive in the region but many countries in the Eastern Europe and CIS region continue to face fragile political situations. We also see no change in individual risk icons, with the exception of higher risk of political violence in Belarus, easing risk of sovereign non-payment in Moldova and higher exchange transfer risk in Kyrgyzstan.
In Bosnia, tensions continue to fuel the high level of political risk, as elections risk new ethnic tensions. After the elections, political clashes risk delaying government formation at various levels of power, which will be critical for Bosnia’s outlook, especially regarding public infrastructure and the implementation of key reforms. The low level of government effectiveness is a primary cause of the weak business environment.
Belarus has a high level of overall country risk. The risk of political violence has increased from medium to medium- high, mainly driven by political instability. Institutional risks are relatively high due to large amounts of political interference in the economy. Legal & regulatory risk remains high due to extremely poor regulatory quality and low levels of accountability. The lack of structural reforms is also likely to remain an issue.
In Croatia, the overall risk rating remains in medium-low, the lowest of the region. Economic risks are medium-low thanks to the resilience of the economy and the banking sector. Additionally, a budget surplus, low interest rates and strong economic growth have all contributed to a significant reduction of public debt. Meanwhile, the risk of political violence remains medium-low.
In Macedonia, the risk of political violence remains medium- high. Although ethnic and political tensions are less pronounced than they once were, clashes between security forces and various ethnic groups are still a regular occurrence, particularly in border areas.
The Russian economy continues to recover somewhat, as disinflation has lifted consumer purchasing power. Furthermore, higher oil prices and low inflation will continue to boost activity. Indeed, oil remains a key indicator of Russia’s future financial and economic performance. However, the overall risk score for Russia remains medium-high—the risk of political violence is still very high due to new and continued sanctions and the threat of terrorism in the region. The country still needs to enhance the institutional infrastructure, reform the labour market, and increase investment in innovation and infrastructure.
Ukraine’s economic growth has been picking up and the outlook has been improved by the prospect of renewed cooperation with the IMF. However, overall political risks loom. Ongoing geopolitical concerns and the upcoming elections must be monitored. On the whole, political risk remains an important factor for foreign investors.
Moldova’s economic outlook looks brighter, and the risk of sovereign non-payment has eased. However, political risks are persisting amid increasing domestic tensions. The risk of political violence is very high, and the parliamentary elections in November 2018 may exacerbate this risk in the medium-term.
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LATIN AMERICA
Latin America’s recovery has remained disappointing and this is the result of a combination of natural and man-made disasters. We see a general deterioration in the region this quarter as political risks continue to be a concern for businesses.
New governments, political noise and the possible delay of public and private investment are growing risks in a number of countries, with the exception of Chile. Furthermore, weak growth and political constraints have put fiscal targets in peril. Deteriorating fiscal positions remain particularly concerning, given the political difficulty of imposing austerity amid already-weak growth.
On the external side, China’s growth outlook, US-related trade uncertainty and global demand for commodities are the greatest risks to Latin American exports. Overall, the recovery in commodity prices and the fall in imports have helped narrow high current account deficits, and external imbalances are now less of a concern.
Amid growing political instability and low levels of institutional legitimacy, we see the rising risk of political violence in countries like Honduras, Nicaragua, Venezuela, Suriname and Colombia. Political instability and economic conditions in the region have resulted in large groups of people fleeing to neighbouring countries.
The Central American migrant caravan also poses a risk to the region and its businesses and could damage its relationship with the US further. Guatemala, Honduras and El Salvador— where most members come from—are devastated by violence, organised crime and systemic corruption, and are rated as medium-high risk.
In Nicaragua, unrest is ongoing, impacting foreign direct investment, tourism and domestic activity. The risk of political violence increased from medium-high to high due to higher political instability, lower government effectiveness and weaker rule of law. If the Nicaraguan government falls under popular pressure and collapses, it could motivate unrest in other parts of the region. This is especially true for other Central American countries such as Honduras and Guatemala, which suffer from similar political instability driven by opposition challenges.
As Venezuela has veered into collapse over the last year, there has been a clear surge in the outflow of migrants from the country. This increase creates significant challenges not only for Colombia—their main destination—but also other South American and Caribbean countries, which have recovered rather weakly from the 2008 crisis in terms of their labour markets and levels of investment. Brazil, Argentina and Peru look especially vulnerable to these migration inflows due to a lack of fi room and weak political environments. Poor Caribbean countries are also likely to suffer, as their services and economies can get overburdened very quickly.
Due to the global risk-off environment, political scandals and poor communication by the authorities, the market has lost confidence in Argentina. In this increasingly adverse environment, markets have become more reluctant to finance the country, which has exacerbated Argentina’s already-high economic risk.
Although Brazil’s overall political risk remains unchanged, further risks are emerging after Bolsonaro’s victory. During his electoral campaign, Bolsonaro hardly discussed his government plan. However, it is expected that he will implement a market-friendly programme to reduce the size of the state, creating opportunities for businesses. There is room for positive surprises but they will be marginal, both because there is limited room for real improvement in fiscal accounts and because Bolsonaro will likely have difficulty forming a coalition to approve constitutional changes.
Colombia’s overall risk remains medium, and growth has continued to recover. The government was expected to provide a fiscal impulse next year via tax cuts, but there are risks that this will not fully pan out. Terms of trade have also benefitted the country and the government has also promised economic continuity, boosting business confidence. However, the integration of Venezuelan refugees into society and the new government’s revision of the peace accord with the Revolutionary Armed Forces of Colombia could imply a higher risk of political violence and social unrest.
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MIDDLE EAST AND NORTH AFRICA
The Middle East and North Africa region has experienced no change in its overall risk rating. Rising oil prices and strong external demand have reduced fiscal deficits and boosted economic growth in the region.
However, the region still contains some of the highest-risk countries in the world, such as Iraq, Syria, Yemen and Libya. Instability and violence are still the main risks to the regional economic outlook. War is continuing in Syria and Yemen, which has also taken a toll on countries like Jordan, Lebanon and Iraq. Yemen remains the riskiest country in the region, with an overall risk rating of very high. Its situation continues to deteriorate as 14 million people across the country face imminent famine.
On the external front, a sharp tightening of global conditions and growing trade tensions could potentially trigger significant fiscal and financing pressures for many countries, clouding economic recovery.
Although Iraq’s overall political risk remains unchanged at very high, higher oil prices and security improvements are supporting economic activity and could potentially reduce economic risk. However, the large fiscal deficit and the drawn-out process of government formation are still dragging growth.
Iran continues to have high levels of overall risk due to a high risk of political violence, driven by mounting tensions within the region, as well as with the new US sanctions likely slowing Iran’s growth. If the US succeeds in cutting Iranian oil revenues, this will hit the economy hard and exacerbate structural weaknesses, which could lead to social unrest. However, China has already rejected US requests to cut oil imports from Iran. Additionally, institutional risk remains high as widespread corruption and weak rule of law contribute to high legal & regulatory risk.
Despite Egypt’s overall score remaining unchanged at high, the risk of sovereign non-payment has slightly eased, and we are seeing some improvements in its fundamentals. For instance, progress has been achieved regarding structural reforms. Also, the government’s effort is yielding some results by helping reduce exchange transfer risk and lessening Egypt’s high debt burden and fiscal deficit. Going forward, if the government continues on this path, the economy is likely to improve due to strong investment, a beneficial external sector and security improvements.
Saudi Arabia’s overall risk rating remains medium. There is significant market uncertainty surrounding potential sanctions on Saudi Arabia following the disappearance of Saudi journalist Jamal Khashoggi. We do not expect the political noise to recede, but we believe countries are likely to respond to Saudi Arabia via other non-oil related measures rather than sanctions. Growth should continue to recover as oil prices continue to rise. True diversification for the economy remains a future challenge, with the ARAMCO IPO delayed and oil prices not high enough to finance a large-scale spending plan.
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SUB-SAHARAN AFRICA
Gambia and Ghana are the only two Sub-Saharan African countries that improved their overall risk ratings this quarter.
The sources of risk are varied throughout the region, but debt burdens put a risk to many African countries. The IMF has recently warned that Africa is heading towards a new debt crisis, with the number of countries at high risk doubling over the past five years. Currently, Angola, Congo, Gambia, Ghana, Mozambique, Cape Verde, Mauritania, Sao Tome, Nigeria, Togo, Zambia, Zimbabwe and Sudan are the countries with the highest debt burdens.
Also, Sub-Saharan Africa’s two biggest economies, Nigeria and South Africa, will hold elections next year.
The signing of a peace treaty between Ethiopia and Eritrea— which follows two decades of territorial disputes and confrontation—is a significant milestone in reducing security risks and increasing prosperity for both countries, and for the region as a whole. However, the presence of (and continuous attacks by) extremist groups remains a threat, making the risk of violence very high across many African countries including Somalia, Mozambique and Nigeria. Religious extremism in Somalia has the most wide-reaching implications for its country risk profile since it is in the middle of a civil war. In addition, Mozambique’s risk of political violence has been on the rise.
Despite recovering oil prices, Nigeria’s oil industry has faced production and export hurdles amid an atmosphere of political instability. The risk of instability in the Niger Delta— and the presence of the extremist group Boko Haram—have made the risk of political violence very high. Outbreaks of violence and localised instability will remain very much part of Nigeria’s political outlook as the country will go to the polls in 2019.
South Africa’s overall risk rating remains medium. While the country currently enjoys relative political stability, economic activity will remain sluggish due to weak fundamentals. The outcome of the summer 2019 election will be key in determining how the South African government tackles the country’s structural problems. This quarter also saw a small reduction in supply chain disruption risk from medium to medium-low.
On the upside, high global commodity prices will help stabilize a number of economic indicators across the region, ranging from fiscal and current account positions to foreign exchange reserves and exchange rates. Oil exporters, such as Angola and Nigeria, will particularly benefit.
Gambia’s overall risk rating improved from high to medium- high, on the back of lower risks from exchange transfer, political interference and supply chain disruption. The strengthened macroeconomic backdrop will continue to provide room for President Adama Barrow to maintain broad political support and to continue to push through reforms to state institutions. The risk of supply chain disruption has eased on the back of the government’s improved ability to respond to such disruptions. Political risk remains high and the country faces several key challenges, including a limited availability of foreign exchange reserves, weak agricultural output and a slowdown in tourism.
Ghana’s improvement in its overall political risk rating from medium-high to medium is driven by lower supply chain disruption risk and a lower risk of sovereign non-payment. Ghana remains one of the countries in Sub-Saharan Africa with lower overall political risk, maintaining a relatively peaceful environment and stable democracy. Improving rule of law also contributed to the lower risk. There have been improvements in the nation’s fiscal and current account deficits, which have eased the risk of sovereign non-payment.
Mozambique recently passed electoral reforms as part of its peace negotiations with opposition forces. The upcoming general elections in October 2019 could have significant implications for the country’s chances of peace and stability. We do see some risk of violence from the nascent radical Islamist movement in the northern province of the country. However, we do not currently see a real threat to the regular tourist trade.
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