Economists may find evidence of a global economic recovery decidedly mixed, but to those who evaluate the creditworthiness of countries around the world, the future appears to be unequivocally -- and unexpectedly -- bright. Country risk, as measured by Institutional Investor‘s exclusive country credit survey, rose a robust 1.4 points from March 2002, hitting 42.5 on a scale of zero to 100. That is the second-highest level in the past two decades.
The rise was not only substantial but broad-based. Fully 131 of the 151 countries in the survey saw their ratings increase, and the ratings of 97 climbed by at least one point -- the amount considered statistically significant. Of the 19 countries that declined, only seven fell by a point or more. In our survey a year ago, 22 rose and 70 fell by at least a point.
Respondents say most of the changes reflect one thing: a conviction that the global economic growth engine has restarted. Renewed growth means expanding exports, replenished government coffers and rising markets. All seven regions in the survey saw their ratings rise.
To be sure, there were a few black marks: Argentina fell 8.0 points, to 15.8, because of its economic crisis, and it pulled down neighboring Uruguay 7.1 points, to 41.9. Japan’s continuing travails brought its ratings down a further 3.2 points -- the fourth-largest decline in the survey -- to 82.7. Other noteworthy sliders: Venezuela (3.8), North Korea (1.5), Uganda (1.2) and Kuwait (1.0). Almost everywhere else, though, a rising tide was seen to lift all boats, even some with glaring leaks.
Can it really be that things are getting better for 131 countries? Stephen Taran, global head of sovereign credit research at Salomon Smith Barney, said before fresh concerns about the strength of the U.S. recovery surfaced: “We’ve had six months now where we’ve had growth globally. The recession in the U.S. has proven to be relatively short and relatively shallow, and the result is favorable for sovereign credit.” Moreover, Taran added: “Two major regions of the world -- Asia and Eastern Europe -- have made substantial strides in structural reforms. The Asians did it as a result of the crisis in 1997'98, and Eastern Europe is being driven by the whole accession [into the European Union] story.”
Nevertheless, the across-the-board surge in ratings “surprises me,” confides Phillip Gadzinski, senior country risk analyst at Australia and New Zealand Banking Group in Melbourne. “I would have thought the results would have been either similar to the previous survey or else lower.”
Some observers suggest that there may have been a certain amount of, well, irrational exuberance three months ago when many survey respondents were completing their questionnaires. The mood has since cooled. “The first-quarter figures for the U.S. were quite good, and Japan had some positive figures as well,” notes Jeavon Lolay, a country risk economist at Lloyds TSB Bank in London. As summer began, “the Argentina contagion was controlled,” he notes, “so if you looked at that stuff, you might feel things were turning around nicely.”
However, as the summer unfolded, he says, “there was more of a negative attitude because of the markets themselves.” He notes that the swift downturn in the equities markets may have helped sour views of country risk.
Whatever the volatility elsewhere, there was widespread agreement that Eastern Europe is showing genuine and
enduring improvements. Its regional rating climbed 2.4 points, to 35.6, the region’s highest rating since September 1990, as 20 of the 25 Eastern European countries rose a point or more.
One of the principal forces driving this upsurge was Russia’s resurgence. The country rose 6.8 points, tying with Belize for the second-largest gain in the survey (after Grenada). “A lot of this reflects repayment of IMF debt; plus the underlying fundamentals have strengthened a lot, so there is both the ability and willingness to pay debt,” says Lolay of Lloyds TSB.
As in the good old Comecon days, the Russian locomotive helped pull up others in Eastern Europe. “There are interlinkages among these economies, and Russia is a big factor for all of them -- they export a lot to Russia, so if it improves, they improve,” says a Viennese banker.
Ukraine in particular is still something of an economic satellite, and Russia’s strength helped push it up a solid 4.0 points. Several other forces were at work in Eastern European gains. One is the continuing romance with the Baltic states. This time Lithuania was up 4.5 points, Latvia rose 3.8 points, and Estonia climbed 3.3 points. “They’re simply good little economies,” says one German banker. And Kazakstan climbed 3.8 points, reflecting faith in its oil deposits.
Eastern European ratings are benefiting not only from expectations of increased exports to, and investment from, a revitalized Western Europe but also from the prospect of EU membership: Getting in shape to join the EU, Eastern European countries are putting their financial affairs in tip-top order. Last, Eastern Europe is looking better because of problems elsewhere. “In term of capital flows, a lot that might have gone to Latin America is ending up in this region,” Lolay says.
The second-strongest rise in the survey was chalked up by Asia-Pacific, which saw its rating climb 1.4 points, to 43.1. This upturn ends three successive ratings declines since the regional rating peaked at 47.4 in September 2000. Eighteen of the 25 countries in the region climbed a point or more, while only Japan and North Korea fell by that much. One Canadian bank economist says the problem with Japan is “the lack of recovery and the failure of the political leadership to come up with any approach.”
In general, though, Salomon Smith Barney’s Taran says, “Asia is now once again the most rapidly growing region globally.” It’s benefiting from global growth in several ways. Australia (up 1.5) and New Zealand (up 2.8) are selling more agricultural products and minerals, and South Asian countries are expanding sales of electronics products and other exports. But Asia’s economic dynamics are changing. “Intra-Asian trade is growing quite nicely,” Taran points out, “and China is emerging as a real source of import demand.” Structural reforms in many parts of Asia since the 1998 crisis mean that the region’s banks are in much better shape. Taran is particularly high on South Korea, up 2.9 points: “Its performance is fantastic.”
While Asia’s economic engine is purring, politics are pretty stable. Malaysian Prime Minister Mahathir Mohamad
“is stepping down and setting out an orderly succession process,” notes the Canadian banker, “and though you’ve got the same old, same old in the Philippines, there are no major threatening upheavals. Even Indonesia is looking healthier.”
Few were surprised that Thailand led the Asian upturn, rising 3.7 points. But the second-largest gain was tallied by Vietnam, up 3.0 points. ANZ’s Gadzinski says of the country: “The economy is ticking along, and there are a lot of domestic reforms. They’re leaning toward more of a market orientation, although there is still a lot of endemic corruption to get over.”
In the current rosy context, much is forgiven. Even bottom- dwelling Afghanistan rose a solid 2.4 points.
Nowhere was this forgiving attitude more visible than in the Middle East, which tied with Africa for the third-largest regional gain: 1.3 points. The Middle East rise was surprisingly broad-based. Ten of the 14 countries in the region rose a point or more, and only one fell by that amount. The big winner, Cyprus, up 3.9, clearly benefited from foreign investment. “It not only attracts foreign investment directly, it benefits from foreign investment in Greece,” points out one British banker.
Meanwhile, the view that an expanding global economy would require more oil at strong prices boosted Qatar (up 2.9), Saudia Arabia (1.7) and the United Arab Emirates (1.7). In contrast to the other oil producers, however, Kuwait fell a point. “It’s next to Iraq,” notes the Canadian banker, adding that “if and when the U.S. undertakes military action, Kuwait is likely to feel the impact.”
Then what explains the increased ratings of countries at the center of the endless Middle East conflict? The increases registered by Israel (up 2.3), Jordan (1.4), Syria (1.1) and Iran (1.0) puzzled all of those II interviewed. “What are these people smoking?” asks one skeptical London banker, adding: “Don’t they read the newspapers? There’s a war going on.”
Africa‘s rise seemed to reflect no news at all. The continent rose 1.3 points, reaching 23.6 points. That’s close to its recent high of 23.9, reached in September 1999. The biggest gain was tallied by Morocco, up 4.5 points, the fourth-biggest increase in the survey. Both its agricultural exports and its tourist industry will benefit from the expected European economic expansion. Tunisia rose 2.7 points for similar reasons. And South Africa was up 2.8 points because, as one banker says, “They seem to be getting a handle on things.”
If the Middle East’s and Africa’s overall gains are difficult to explain, Latin America‘s is equally perplexing. Eighteen out of the 25 Latin and Caribbean countries rose, while only three fell by a point or more. That boosted the regional rating 1.1 points, to 37.0, 2.2 points below the recent high of 39.2, registered in September 2000.
The major declines were easy to understand: Argentina dropped 8.0 points amid its worst financial crisis in decades. It’s now down 30 points in two years and has fallen from the sixth-best regional credit in March 2000 to 23rd out of 25, outranking only Cuba and Haiti.
While Argentina’s travails proved to be a major drag on Uruguay’s rating, the other big decline was in Venezuela, whose slump can be attributed to the on-again-off-again revolt against the Hugo Chávez regime. Brazil, meanwhile, dropped a barely perceptible 0.3, in spite of dramatic foreshadowing at the time of the survey of another dire financial crisis, which duly materialized.
Ratings of many smaller Latin and Caribbean countries climbed, often substantially. Grenada (up 7.2) and Belize (up 6.8), hardly focal points of global capital flows, recorded the two largest advances in the survey. For some respondents global expansion is seen as a boost to the important Caribbean tourism industry. For others expansion will increase Latin exports of food and raw materials.
The two smallest regional gains -- 0.9 points -- were tallied by Western Europe and North America. In Western Europe eight countries rose by a point or more, while none fell by that much. The biggest gains were at the region’s periphery. Finland rose 2.1 points, because its neighbors and trading partners on both sides -- Western Europe and Russia -- were growing. Ireland continues to be the fair-haired lad because of its good growth. And Greece, up 1.5 points, is seen as benefiting from the discipline imposed by EU membership. The Nordic countries and Spain were also seen as beneficiaries of the EU and the euro.
Among the four horsemen of Europe, Italy and the U.K. registered small gains (0.9 and 0.4, respectively), while France and Germany fell slightly. Nonetheless, the EU is bringing ratings into harmony, much as it has brought other once disparate European economic statistics into increasing alignment.
The U.S. is supposed to supply the pistons driving the growth engine. Mexico was up a solid 1.8 points because it should benefit from a resurgence in U.S. imports. But faith in the U.S. didn’t have any effect on Canada, and the U.S. itself rose only 0.6 points.
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