Better times are coming-and this time our panel really means it.
Don’t let all the doom and gloom get to you. Germany and Italy may have slipped back into recession, the U.S. may be resorting to risky fiscal stimulus plans to jump-start its flagging economy, but sovereign credit analysts and investors around the world see the world’s creditworthiness slowly creeping back up -- just as they did in September 2002.
Global creditworthiness, as measured semiannually in Institutional Investor‘s Country Credit survey of sovereign risk experts at financial institutions around the world, rose 0.6 points, to 42.7, on a scale of zero to 100, compared with the March survey and rose 0.2 points compared with the September 2002 average rating (averaging the scores of only those countries included in both 2003 surveys). The global rating still sits below the 20-year high of 43.4 reached in September 2000.
The current rise reflects an easing of the two concerns that damaged ratings six months ago and dampened analysts’ hopes of last fall: The worst fears regarding U.S. military action in Iraq and the U.S. economy seem not to have materialized. The U.S. government revised its estimate of second-quarter GDP growth from 2.4 percent to 3.1 percent. As for global tensions, “Politically, the main Iraqi issue is solved,” says Toshihide Terada, joint general manager of the credit division of Aozora Bank in Tokyo. “We still have a North Korea problem, but I think politically things are more stabilized, and that’s why the average rating went up a little bit.”
To make the September 2003 survey more comprehensive than in years past, we have included 21 new countries, for a total of 172. (Serbia & Montenegro replaces Yugoslavia.) The editors believe that, as the Country Credit survey has become an ever more widely followed benchmark of sovereign credit quality, it is important to be as inclusive as possible.
In comparing results of this edition and the March survey, we distinguish between global and regional averages of countries that were included in both surveys and averages of the total coverage (including new countries) in the September survey. Most of the new countries are small and have relatively low credit ratings. As a result, the September 2003 global average Country Credit rating of 172 countries is only 39.6, 2.5 points lower than in March.
Overall, 54 countries rose a full point or more, the amount considered statistically significant; 36 declined by at least as much. The biggest change was in Kuwait, which shot up 15.6 points, achieving one of the largest moves in the survey’s history as any lingering threats from Iraq diminished. Looking only at countries covered in both 2003 surveys (and with Serbia & Montenegro replacing Yugoslavia), Eastern Europe registered the biggest regional gain, increasing by a solid 2.6 points. Africa, Asia-Pacific and the Middle East also rose, and Latin America was unchanged. North America dropped 1.2 points, and Western Europe fell 1.1 points.
Eastern Europe‘s climb was broadly based, with 17 countries rising 1 point or more and only one declining by that much. At least some increase was shown by 21 out of 25 countries covered in both surveys (including Serbia & Montenegro). Two new countries, Armenia and Bosnia & Herzegovina, were added to the Eastern European list: Including them, Eastern Europe would have risen by only 1.3 points.
Surprisingly, the biggest gains in the region were not tallied by the usual suspects: To be sure, the Czech Republic was up a sturdy 1.9 points, but Hungary was unchanged, reflecting concerns about fiscal problems, and Poland rose only 0.5 point, on worries about unemployment. Instead, the biggest movers were states slated to join the European Union in 2004 or 2007. Ratings for Bulgaria and Romania (see box, page 97) increased by 7.4 points each, the third-biggest rise among all countries in the survey, behind Kuwait and Algeria. Other beneficiaries of future EU accession were Slovakia (+6.6) and Slovenia (+2.8). Ukraine rose by 7.0 points, making it the fifth-biggest gainer, even though EU membership is more distant for that country and reform is less visible. Because of the prospect of joining the EU, “there is a vision that these countries will perform better in the future,” says Ursula Franke, an economist at Landesbank Rheinland-Pfalz in Mainz.
“Accession means free trade with Eastern Europe’s biggest customers; it means more movement of production sites to the lower-cost East,” says a New York bank economist. “But above all, it means financial and technical assistance, before as well as after joining the EU.”
Analysts also remained convinced that reform has taken hold in Russia. That, plus continued strength in the oil sector, boosted it by 3.4 points. Oil also pushed Kazakstan up, by 3.2 points. As its rating has risen by 18.4 points over the past three years, Russia has climbed from 95th in the survey to 62nd.
The arrows were all pointing the other way in Western Europe, whose regional rating fell by 1.1 points, to 83.4, over the past six months. Fifteen countries declined, and only five gained. All ten of the countries that moved by at least 1 point declined.
A recession in Germany, combined with doubts about Chancellor Gerhard Schröder’s commitment to economic reform, made that country the region’s second-biggest loser, with a 5.5 point decline. “At one time, Germany was a very strong, solid country economically, but the situation now is very similar to Japan,” Aozora Bank’s Terada says. “It has structural problems, and it is as bureaucratic as Japan.” German recession, together with the U.S. slowdown, pushed down the rest of Western Europe, with Italy off by 1.2 points and the Netherlands giving up 1 point.
Meanwhile, Turkey dropped by 2.5 points, even though “there are a couple of encouraging signs, from an economic point of view,” says Stefan Kolek, a senior fixed-income analyst at HypoVereinsbank in Munich. But post-Iraq Turkey’s declining geopolitical importance to the U.S., he adds, makes it “less likely to receive the financial support that it received quite easily before.”
The biggest decline in the region, and in the survey, was Malta, which fell a mystifying 6.5 points. Nothing bad seems to have happened to this, the littlest, EU accession state, so one London respondent says, “Maybe its rating just got a little ahead of itself.”
The Western European decline was paralleled by a 1.2-point fall in North America. Since the last survey, the U.S. has demonstrated its status as the world’s only military and economic superpower, but that’s precisely what caused some respondents to mark it down by 0.5 points. As the U.S. turns from Iraq to problems in North Korea, Liberia and elsewhere, analysts and investors are concerned that U.S. power is spread too thin. Its healthy second-quarter GDP growth rate is encouraging, but not everyone is convinced that the Bush administration’s tax cuts will restart the U.S. economic engine.
Concern about limited U.S. economic growth spills over into Mexico, which fell by 3.7 points, and there is also mounting apprehension among risk specialists that the administration of President Vincente Fox is not delivering the reforms many had expected.
By contrast, the outlook is improving in the Asia-Pacific region, whose rating rose 1.0 points, to 44.3, when only countries appearing in both 2003 surveys are considered. (With the five new states added, the regional average fell by 2.8 points, to 40.5.) Ten countries rose by 1 point or more, and five declined by that much.
The gainers fell into several categories. Indonesia (+5.3), Thailand (+4.7) and Malaysia (+2.5) rose as ongoing economic reforms trumped any political concerns. This was particularly true in Indonesia, which was up sharply despite bombings in Bali and Jakarta that suggested militant Islam was on the rise.
A second set of gainers in the region was composed of Vietnam (+4.2), Laos (+3.6) and Cambodia (+1.6). Analysts note that the region offers very cheap labor, even compared with China. “This is the next wave of industrializing countries in Asia,” says one New York banker.
And then there was Pakistan, up by 5.7 points, the eighth-biggest gainer in the survey. Geopolitical concerns helped drive the rise; the thinking in many quarters is that it has a more docile neighbor on the West, a de-Talibanned Afghanistan, and better relations with its neighbor to the east, India. “But economically, it’s still a mess,” adds one Dutch banker.
The region’s biggest loser was Japan, down 4.8 points. The top-ranked country in the survey from 1986 until 1990, Japan has fallen to 23rd place -- just ahead of Taiwan, Greece and Iceland -- a victim of more than a decade of economic woes. “It’s the same old story,” says Landesbank Rheinland-Pfalz’s Franke: “Deflation, problems in the banking sector, etc., etc.” But Maxine Koster, vice president in the global economics department at Credit Suisse First Boston in London, sees a brightening future, thanks to a rising stock market -- as of late August the Nikkei 225 index was up 19 percent for the year and had climbed 35 percent from its 2003 low in April -- growth in employment and a better-than-expected GDP growth rate. “If you did the survey today,” she says, “I bet [Japan’s rating] would be up.”
Though the impact of severe acute respiratory syndrome appears to have nicked Hong Kong (-0.8) and China (-0.1), the general sense among analysts and investors responding to the survey is that Asia is advancing and any signs of a real resumption of growth in the U.S. will bring a great leap forward in much of the region.
The always-troubled Middle East also gained: Its rating rose by 0.6 point, to 46.8 (including only those countries ranked in both March and September), largely on the strength of Kuwait’s massive increase. “The neighborhood bully is gone,” says one New York banker of Iraq, which invaded Kuwait in 1990 and has been a constant focus of conflict ever since.
Three other countries also rose, albeit modestly: Qatar was up by 2.2 points because of its oil (which, nonetheless, didn’t keep the United Arab Emirates from dropping by 1.7 points). Iran gained 1.0 point, based on signs of continuing moderation and reform. And Cyprus rose by 1.1 points, on faith that growing harmony between Greek and Turkish interests would lead to greater prosperity.
The biggest loser was Saudi Arabia, down by 3.6 points owing to political concerns and a belief that oil markets might weaken with Iraq and Venezuela back onstream. “The Saudis’ policy of buying off everybody it could, including terrorists, may come back to haunt the kingdom, either through terrorism or through the enmity of the U.S.,” says a banker. Meanwhile, Israel and Egypt each fell by 2.7 points, and Syria dropped by 2.5 points.
Finally, respondents showed that they were neither shocked nor awed by what has happened in Iraq. Its rating rose by only 0.4 point, to 8.4; that’s down 1.8 points from where it was a year earlier. Overall, the Middle East rating of 45.3 (including newly added Yemen) is the same as it was in March 1981.
Stability was also the watchword for Latin America, whose overall rating remained unchanged when only countries appearing in both March and September are included in the average. With the addition of low-rated Guyana, the regional rating was off by 0.5 point. But the stability of the regional average conceals considerable movement at the country level. Eight countries rose by 1 point or more, and seven others fell by that amount.
Argentina’s 3.9-point jump was the biggest gain in the region. “It was so bad that it can only do better,” says Franke of Landesbank Rheinland-Pfalz. The rise reflected the view that the country had turned a corner and that it had achieved a better position in the balance of power with its official creditors. “Remember the adage,” says a New York bank economist: ‘Owe a bank a thousand dollars, and it’s your problem; owe a billion dollars, and it’s their problem.’ If Argentina can’t get a deal enabling it to repay the International Monetary Fund and the World Bank, their triple-A status would be threatened.”
Peru rose by 2.0 points, as the discovery of new mineral deposits frosted a cake baked with “low inflation, stable exchange rates and a pretty good external debt burden,” according to Franke. Meanwhile, Brazil climbed by 1.0 point, as fears about its left-leaning government eased. On the other side of the scales, Paraguay (-6.2), Bolivia (-3.2) and Venezuela (-2.5) all fell because of political travails. And Uruguay dropped by 4.3 points on the fallout from Argentina’s problems.
In the Caribbean and Central America, Trinidad & Tobago, up by 2.8 points, and El Salvador, up by 4.9, recorded strong advances. Countries in this area have benefited as declining U.S. Treasury yields have pushed fixed-income investors into emerging-markets bonds, even as the problems of big Latin American issuers such as Argentina, Venezuela and Brazil have shifted attention to Central American and Caribbean credits.
No great leaps were made in perpetually beleaguered Africa, but its regional average (including only countries covered in both 2003 surveys) rose by 0.8 point, to 24.3. The region added 12 new countries; with them, Africa’s average dropped by 1.6 points.
The biggest gains were along the Maghreb. Algeria, benefitting from easing Islamist civil tensions, rose by 8.2 points, representing the survey’s second-largest gain. Morocco climbed by 3.3 points, and Tunisia rose by 1.9 points, reflecting faith in oil, tourism and increased stability.
At the other end of the continent, South Africa rose by 2.2 points. “They have a very sober fiscal policy, they’re making progress in privatization, inflation is coming down sharply, and the central bank policy is showing results,” says HVB’s Kolek. The two other economic powerhouses by African standards, Botswana (+5.9) and Mauritius (+3.3), also recorded smart gains based on good economic performance. Most of the gains in sub-Saharan Africa reflected stronger commodity prices.
Despite problem countries throughout several regions, CSFB’s Koster says, “We’re seeing much more positive data recently.” That has stimulated optimism, she adds, but “we’re waiting to see if this is a short-term phenomenon or if the recovery is sustained.” Virtually every cheery scenario for global economic recovery assumes that the U.S. economy gains traction, but Aozora Bank’s Terada isn’t convinced: “Some parts” of the U.S. economy are growing, he says, but “consumers have too much debt,” and eventually “they will hesitate to add more, and that will shrink domestic consumption,” stifling growth. Many others are betting on continued American profligacy, and they insist that the U.S. economy is reviving. That should bring more exports -- and rating gains -- to Asia, Latin America and Western Europe. If that happens, our sovereign risk specialists’ optimism about global credit will be justified this time.
Associate Editor Emily Fleckner and Researcher Michele Bickford compiled the statistics for this feature.
II’S FALL 2003 COUNTRYCREDIT RATING
COUNTRY CREDIT RATING
When the U.S. and its allies toppled Saddam Hussein, they also did wonders for Kuwait, whose Country Credit score soared by 15.6 points from March and by 16.3 points over the past year. That surge made Kuwait this survey’s biggest overall winner for both periods. High oil prices supported by lower-than-expected postwar Iraqi oil production helped bolster Kuwait’s standing, as did U.S. spending on infrastructure projects and logistical support throughout the region to keep troops in Iraq. Recent privatization initiatives and government pledges to support foreign direct investment legislation may also encourage investors. But is Kuwait’s dramatic surge in creditworthiness warranted? “Our view of the overall creditworthiness of Kuwait has been very stable in recent years,” says Frankfurt-based Dresdner Bank senior economist Gregor Eder. “The macroeconomic picture itself has not changed.” Strong foreign exchange reserves, a sturdy banking system and relief over the ousting of Saddam Hussein may have overwhelmed any worries about threats to Kuwait’s long-term health. But with 80 percent of Kuwaitis still on the government payroll and few attempts by the country to diversify its economy, some economists prefer to remain wary a bit longer.
II’S FALL 2003 COUNTRYCREDIT RATING
COUNTRY CREDIT RATING
Romania has come a long way from its violent post-Soviet revolution, but its difficult transition is paying off. One of two countries favored to join the European Union in 2007 in a second round following the 2004 accession of ten states, Romania made a 7.5-point leap in the Country Credit survey over the past year, the third-largest point increase of any country. (Bulgaria, the other candidate for 2007 EU accession, ties with Romania for third-biggest six-month gain.) So far, Romania’s EU prospects look good. “Romania has improved vastly over the past few years from the macroeconomic standpoint in terms of reserves and stability,” says Bart van der Made, an economist at ING Investment Management in the Netherlands. GDP grew at 4.9 percent in 2002; exports are expected to rise to $16 billion this year, up from $13.9 billion in 2002; and inflation dropped from 34.5 percent in 2001 to 22.3 percent last year. Perhaps most important, foreign exchange reserves almost doubled throughout 2001 and 2002. In June, Romania completed a seven-year, E700 million ($800 million) bond offering, underscoring the extent to which investors have bought into its economic success story. That’s an impressive turnaround for a country that suffered a “harder kickoff than others into the postSoviet Union transformation process,” notes Gregor Eder, senior economist at Dresdner Bank in Frankfurt. But Romania still faces enormous challenges. Energy and public sector privatization still lags, says Eder, who warns that policies restructuring banking, liberalizing trade and freeing prices “will take some time to bear fruit.” Another sovereigns analyst puts it this way: “Memories of Ceausescu are still in people’s minds. They’re looking for a fresh start, but that’s going to take a couple generations.”
II’S FALL 2003 COUNTRYCREDIT RATING
COUNTRY CREDIT RATING
Combine $30 billion in foreign currency reserves and a budget deficit of less than 1 percent of GDP. Add firming energy prices, then reduce radical Islamist rhetoric and violence to a low simmer. That’s a recipe for a vastly improved credit in the Maghreb. Sovereign risk analysts surveyed in the fall Country Credit poll raised Algeria’s score by 8.2 points since March and by 10.1 points over the past year. Only Kuwait gained more over both periods. Though analysts attribute the jump to firm energy prices and new gas-development contracts with European entities, they also credit a stabilized political climate. “The Islamist problem is the only real problem in Algeria,” says Antonio Martinelli, country risk analyst at Capitalia in Rome. “And we think now that the general situation is improving in North Africa.” European governments are helping Algeria control civil strife. Francis Nicollas, a sovereign analyst at Crédit Lyonnais in Paris, notes conciliatory statements from Abassi Madani, leader of the Islamic Salvation Front, who was released from prison in July. Of course, much could change as Algeria’s population -- underemployed and inured to political violence -- gears up for the 2004 presidential elections. So while Nicollas agrees that the security situation in Algeria is brightening, he cautions against exuberance.