Click here to view the rankings.
The future is not what it used to be. For the past two and a half years, economists and sovereign-risk analysts have been unabashedly optimistic in their outlook on the world’s economies. Their increasingly positive assessments reached a zenith in March when the overall global rating of Institutional Investor’s exclusive Country Credit survey reached its highest level in decades.
That euphoria has quickly given way to growing anxiety. Fears of accelerating inflation, slowing
economic growth and a weakening dollar sent the world’s equity markets into a tailspin in May. The U.S. economy, which has served as the engine of global growth for years, decelerated sharply in the second quarter. Even most commodities prices have softened significantly. With the world economy apparently slowing after a strong, four-year upturn, there is a palpable sense of heightened risk.
“We’ve been seeing a lot of volatility in financial markets in general over the course of the spring and some pullback in commodities prices,” says Douglas Porter, deputy chief economist at BMO Capital Markets in Toronto, “so there may be a sense that we have seen the strongest point in the global growth cycle.”
The new wariness is reflected in our latest semiannual survey of creditworthiness. The overall global credit rating, which reached 45.1 on a 100-point scale in March, is down 1.2 points, to 43.9. Of the 173 economies assessed, 89 fall by at least 1.0 point, the amount considered statistically significant, and only 22 rise by at least that much. That’s a dramatic reversal from six months ago, when 100 countries showed a six-month gain of 1.0 point or more and only 24 fell by that amount.
Just as May’s market turmoil triggered a flight to quality, so too has creditworthiness diverged between rich and poor countries. Of the 25 nations with the highest ratings in the survey — that is, the most industrialized nations — 23 show at least some six-month increase in their ratings, including 11 that are up by 1.0 point or more. By contrast, of the 25 nations with the lowest ratings, most decline by 2.0 or more points.
“The Fed has been raising rates, and some other countries’ are increasing as well, so the days of cheap money are behind us,” Porter says. “Rising interest rates are never good things for debtors.”
Economic forces aren’t the only factors driving down ratings in developing markets. Perceptions of increased political risk contributed to sharp declines in Bolivia, Iran and Ukraine, among others. But Per Bertram, a senior manager at Nordea Bank in Copenhagen, notes that the prospect of political instability “has always been a major characteristic of emerging markets. On a global scale it’s not much more than it used to be.” Rather, he and other respondents insist, the major driving force is a sense that emerging markets face a double whammy of slowing demand for their products and higher interest rates on their debts.
In Western Europe, 15 of the 19 countries have higher ratings than they did in March, including six that are up by 1.0 point or more. The region is paced by Ireland, whose rating is up by 1.7 points. “We’ve seen an upswing in business confidence since the start of the year because of a modest improvement in growth throughout Europe,” says BMO’s Porter. Real regional annual growth may struggle to hit 2 percent this year, “but instead of decelerating further, there seems to be a little pickup, to the point where the [European Central Bank] is steadily raising interest rates,” he adds.
Creditworthiness increased among the Asia-Pacific/Far East industrial economies: Japan is up 2.5 points; Singapore, 2.1 points; and Australia, 2.0 points. Japan’s rise reflects the now nearly universal conviction that its long national economic nightmare is over. Foreign investment in Japanese stocks last year rose 26.7 percent (measured by market value), the third consecutive record high, and the Japanese economy grew at a real annualized rate of 3.1 percent in the first quarter. Meanwhile, the developing economies of Asia-Pacific/South & East took a knock. The regional rating is down 1.8 points, with 17 countries falling, one flat and only five showing any increase.
Latin America and Caribbean economies aren’t faring much better. Overall, the region is down 1.6 points and 24 out of 27 countries have minus signs, with 17 falling by at least 1.0 point. “It is basically credit tightening and lower commodities prices that have driven down ratings across the region,” notes Eugenio Aleman, senior economist at Wells Fargo Bank in Minneapolis.
What about the apparent swing to the left in Latin politics? Survey respondents reacted strongly to the election of Evo Morales as president in Bolivia (–6.1 points), but many commentators insist political concerns are overstated. “Right now there is very little extremism going on in Latin America,” Aleman says. “While Venezuela makes a lot of noise, the rest of the countries are much more concerned with trying to enact coherent economic policies.”
Brazil is swimming against the tide, registering a 2.5-point increase. “It has had very sensible policies,” says one New York banker. President Luiz Inácio Lula da Silva has proved to be an economic moderate, and the prospect of his reelection in October is actually seen as the conservative course.
The emerging markets of Eastern Europe/Central Asia also weakened, with 18 of 28 countries falling by 1.0 point or more and only one, Georgia, rising by that much. Georgia’s strong suit was increased political credibility, but elsewhere politics was a negative: Would the Orange Revolution be undone in Ukraine (–4.9 points)? Would the vast oil wealth of Russia (–1.7 points) be swallowed by an increasingly authoritarian regime? And what is going on in the former Yugoslavia, anyway, with Serbia-Montenegro down 2.8 points (they had not yet voted to split up when our survey was fielded) and Bosnia & Herzegovina down 2.4 points?
The assessment of the Middle East & North Africa region was completed before fighting erupted between Israel and Hezbollah in southern Lebanon, but rising tensions are already evident in the regional rating decline of 0.9 point. Seven of the 19 countries are down by 1.0 point or more; only two, Cyprus and Iraq, are up by that much. (Why Iraq is up a point was unclear to many survey participants — “Bush jawboning?” asked one New York banker — but the increase is enough to boost it from No. 172 in the ranking to No. 166.)
Iran leads the region’s downward march, falling by 5.8 points, mainly because its political leadership, engaged in a standoff with the West over its nuclear ambitions, is seen as dangerous. The ratings of Egypt, Israel and Jordan fall by more than 2.0 points each. “It has to do completely with political risks,” says Nordea Bank’s Bertram, “because most of the countries are doing a lot better economically.”
As usual, even the hint of economic bad news elsewhere had ramifications for sub-Saharan Africa. The regional ranking is down 1.7 points, to 21.6, as 32 of 47 countries fall by 1.0 point or more and only four rise by at least that much. “It’s a combination of general emerging-markets sentiments plus higher oil prices, since most countries in Africa are oil importers and a lot of countries had increased political instability,” says Paul Koenekoop, head of country risk research at ING Group in Amsterdam. The bright spots are Angola (up 2.7 points); Gabon (up 2.5 points); Tanzania (up 1.2 points); and Zambia (up 1.1 points), where political news was less negative than it had been.
Does all this doom and gloom mean that the gains of recent years are poised to fall away? “A lot depends on whether the U.S. economy can achieve a soft landing,” says BMO’s Porter. “If the U.S. can continue to get growth of 3 percent, that would be ideal and we could actually see ratings improve over the next six months.” Although weaker growth could mean slack demand and more payment difficulties in nations around the world, stronger U.S. growth is not necessarily good: “We could be looking at higher interest rates,” he adds.
Not to worry, says Aleman, the Wells Fargo economist. Yes, growth rates and monetary policies in the developed world will be the drivers, but, he insists, “I don’t think there is a possibility of a serious crisis in the emerging markets. They have a very good balance-of-payments position and a high accumulation of reserves, so that will allow them to survive a little bit more.” i
