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Shave and a haircut

The global slowdown trimmed the rankings of a broad swath of countries, though some got into plenty of trouble on their own.

The global slowdown trimmed the rankings of a broad swath of countries, though some got into plenty of trouble on their own.

By Harvey D. Shapiro
September 2001
Institutional Investor Magazine

The Country Credit Rating results are available in the Research & Rankings section of this site.

The world has become a riskier place. Global creditworthiness, as measured by Institutional Investor's exclusive country credit survey, declined over the past six months. But the current reading , 41.5 on a scale of zero to 100 , represents a more modest reduction (0.8 points) than the 1.1-point drop registered in the previous six-month period.

That countries, creditworthiness would waver in the midst of a global economic slowdown is "not so surprising," notes Junichiro Hiratsuka, a deputy general manager at Fuji Bank. What is surprising, however, is the breadth of the ratings reductions. The ratings of 102 countries fell, while those of just 42 rose. The trend was even more pronounced among the countries whose ratings moved by one or more points, the amount considered statistically significant: Seventy countries fell by at least one point, while only 22 rose by that much.

For Argentina, Turkey and perhaps a dozen other countries (see page 91 and page 112), the reductions reflected well-publicized domestic developments. But while those countries were suffering close shaves, others were experiencing a haircut, because of the notion that "a synchronized industrial world recession would have serious implications for all of the emerging markets," according to Rafael Borja, a sovereign-debt analyst for Bear, Stearns & Co. It's not just that trade isn,t growing; countries are also finding it more difficult to raise capital. Add to that relatively high energy prices, and you have all the ingredients for global contagion.

"I don,t understand this," grumbles Conrad Shuller, a senior economist at Erste Bank in Vienna. "There are no payment disturbances in these countries. In many cases, there are no sovereign credit risks or transfer risks." He adds, "Many analysts have mixed up projections for economic growth and country risk , people should not do this."

Maybe they shouldn,t, but most of the country-risk experts around the world who participated in the survey concluded that reduced global economic growth has weakened dozens of countries. As growth rates suffer, so do country ratings.

The poorest countries have been hit the hardest. Five of the ten biggest declines were recorded by African countries; the other five were also developing nations. The ten biggest gainers, however, also included two African countries , Botswana and Namibia , as well as four Latin American nations and the three Baltic states.

Fittingly perhaps, the two regions whose slowdowns are driving the haircuts, North America and Western Europe, suffered the biggest declines in the survey; both fell 1.4 points. Six months ago the U.S. was described as the unmoved mover: Signs of an American economic slowdown caused other countries, ratings to fall while the U.S. actually rose 1.1 points. This time, the U.S. dropped 1.1 points , more than the global average. This reflects Shuller's lament: Although no one doubts that the U.S. is still the fortress of creditworthiness, respondents chipped away at its rating because of lagging growth.

The U.S. economic virus proved to be especially contagious for its neighbors. Says a Finnish banker, "The continuing weakness in the U.S. is spreading to the whole Nafta region." That's why Mexico was down 2.0 points and Canada 1.0.

But the U.S. slowdown was also blamed for provoking a European downturn. Eighteen out of 20 Western European countries declined in the ratings; only Greece was unchanged, while Denmark rose a minuscule 0.3 points.

The ratings reflect a sobering lesson in globalization. When the U.S. economy first seemed to be turning down, many Europeans not only assumed that they would be unaffected, they also talked of Europe supplanting America as the global economic locomotive. European Central Bank president Wim Duisenberg dismissed the effects of the U.S. slowdown as a "weak wind" that Europe could easily weather (see page 52). Instead, that wind has blown away any illusions about European economic independence.

Western Europe's decline was amplified by Turkey,s financial crisis, which knocked 9.3 points off of its rating , the survey's largest decline and one of the steepest of any country in recent years. And the immediate outlook for Turkey is not bright. Says one analyst: "The economy is likely to get worse before it gets better. In the best possible scenario, the previous devaluation episode of 1994,,95 will be repeated, with a deep but hopefully short-lived recession."

"E-Day" took its toll, too. Germany and Switzerland fell 1.2 and 1.3 points, respectively, because of concerns that their hard-money cultures would unavoidably be corrupted by the January introduction of euro paper and coins. Paradoxically, fears that Italy,s and Spain's soft-money cultures would also be hurt by the euro pushed down their ratings.

The Asia-Pacific region's ratings fell a full point over concerns that its export-dependent economies would suffer in a global slowdown. Because the U.S. buys 25 percent of Asia's exports, the American slump threatens Asia's ongoing recovery from its 1997,,98 financial crisis. The faltering electronics sector was a driving force behind declines for Hong Kong, Singapore, South Korea and Taiwan.

But political concerns spurred the biggest losses. Indonesia fell 3.5 points, while North Korea lost about a third of its already low rating, dropping to 7.0. The decline stems from "disappointment" over the likelihood of North and South Korea being integrated soon, says Bear Stearns, Borja. In Malaysia, down 2.5 points, devaluation pressure may have eased "a little bit," says Marcel Peter, a sovereign risk analyst at Credit Suisse First Boston, but "Mahathir Mohamed's rule is slowly but definitely coming to an end. The whole political situation is risky."

Australia (up 1.4 points) and Vietnam (up 1.5 points) defied the regional downdraft. "The perception is that Australia's economy has held up quite well relative to many OECD countries," says Robert De Iure, a country-risk economist at National Australia Bank Group. Vietnam, meanwhile, is in "the process of a major reform," says De Iure. Others, though, complain that the Vietnamese seem to be saying more than they,re doing.

Latin America fell 0.7 points, to 35.8, as the region demonstrated once again that it is a hotbed of contagion. To no one's surprise, the biggest drop was tallied by Argentina: 5.1 points. Its well-publicized woes also helped bring down its neighbors and trading partners: Brazil declined 1.6 points and Uruguay 1.5. A New York banker adds, "The electricity shortage in Brazil means a further deterioration in the outlook" (see page 99).

Chile and Colombia suffered from the U.S.-spawned virus, declining 1.5 and 1.7 points, respectively. But Peru (,3.8) and Venezuela (,2.5) were pummeled by political as well as economic forces. Bankers wondered what would happen to Peru in the post-Fujimori era (see page 105) and to Venezuela under President Hugo Chávez.

Among the few bright spots was Bolivia, up 1.8 points. CSFB's Peter says, "The IMF is quite positive on it, and there was some debt relief." And El Salvador and Nicaragua, which were among the biggest losers last time, also rose. The trouble is, bankers aren,t sure why. "Maybe regression to the mean," suggests one. But if the overall picture in Latin America looks grim, it's still well above the 21.9 rating it sank to a decade ago.

In the Middle East the picture was mixed, as five countries rose and nine fell. There were problems in the oil-producing states as well as the frontline political-confrontation states. Despite high energy prices, Bahrain, Kuwait, Oman and Saudi Arabia all declined, but Qatar and United Arab Emirates rose. "The UAE has a political system that is much more open than those of other Arab countries," says one analyst. "In Saudi Arabia or Bahrain, the political system relies on keeping almost full employment, and this is not consistent with being an oil producer, a one-resource country; so if oil prices go down, these countries feel pressure on their fiscal accounts, because scaling back expenditures turns very quickly into a highly politicized issue. The UAE is more flexible."

Meanwhile, several states embroiled in the stalled Middle East peace process fell, including Israel and Lebanon, but particularly Syria, which tumbled 3.0 points because of qualms about both the policies and the durability of President Bashar Assad's regime.

Africa registered the smallest decline of any region , 0.8 points. But "that's not a vote of confidence; it's a recognition of how low-rated most of the countries already are," points out a New York banker. The regional average is now 22.3. While 27 countries fell, 12 rose, and the gainers offer the more interesting stories.

Botswana was up 4.3 points , the most of any country in the survey , because it has very good fundamentals, says CSFB's Peter. Indeed, Moody's Investors Service and Standard & Poor's recently rated the country, giving it the highest ranking in Africa. Namibia rose a robust 2.1 points. "It's also a country with low debt and good economic fundamentals," notes Peter, "but there's not a long history on which to make an adequate judgment, and the political situation is somewhat mixed , there are still some Communist influences in the government." Meanwhile, Mauritius climbed 1.7 points, and Morocco rose 1.1 points, even though the rest of the Magreb fell.

Africa's losers suffered from a combination of weak commodity prices, the global slowdown and the customary doubts about their political leadership. That's the recipe that drove down Chad, Côte d,Ivoire and Liberia by more than three points each and a dozen other countries by lesser amounts. And for the first time, a new variable was mentioned when survey respondents discussed Africa: AIDS. "We see a high percentage of people infected, so this might become an important factor in the future," one European banker says.

Zimbabwe, down 3.2 points, was hurt mostly by growing apprehension about President Robert Mugabe,s farmland-reclamation scheme and increasingly dictatorial ways. The former Rhodesia has now fallen 13.5 points in two and a half years, the most of any country. Its problems also drove down neighboring South Africa. Says one observer, "The notion is that if Zimbabwe got out of hand, then the flows of immigrants to South Africa would get out of hand." Although the country has social and political problems of its own, overall South Africa presents a "very healthy" macroeconomic picture, this banker contends.

Eastern Europe was the only region that rose, a barely discernible 0.2 points. Twelve countries garnered higher ratings, offsetting the 11 that fell. But these results are mainly a commentary on weakness elsewhere. Although the region is dependent on Western Europe for trade and investment, the slowdown there had already been discounted, and raters were impressed that several countries seemed to be faring well. The Baltic states were once again among those pacing the region: Estonia (up 1.8), Latvia (2.2) and Lithuania (1.5) have been among the top nine gainers since the fall of 1998.

Slovakia was up a hefty 2.2 points, reflecting economic strength. Hungary also fared well (up 1.8), as did Slovenia (up 0.9). "It's a very good country from a credit risk standpoint , the best in Eastern Europe , because of low debt," says a German banker. Meanwhile, Bulgaria rose 1.6 points thanks to its political stability: "The elections seem to have been quite successful," says Erste Bank's Shuller. "There's a strong government, a reformist government." Kazakstan was up 1.5 points, reflecting growing faith that its oil deposits will actually amount to something. And Yugoslavia rose 1.5 points amid a sense that with Slobodan Milosevic in custody, the worst is over.

In this survey, as in the last one, the U.S. was the pivotal force: America's slowdown drove the ratings of dozens of other countries. But the key factor determining results in the next survey is likely to be the emerging markets. Says a Canadian analyst: "If we see some defaults and restructurings in places like Argentina and Turkey, that could send overall emerging-market sentiment significantly downward. A lot of countries are going to be impacted, and it's going to be a tougher time for countries that are caught up in that wave."

Assistant Editor Laura Witkin compiled the statistics for this feature.

The Country Credit Rating results are available in the Research & Rankings section of this site.