To view the Country Credit Rating results, please click here or go to the Research & Rankings section of this site.
Cheer up. The recession is ending, terrorism is not a global threat, there is little contagion from troubled countries such as Argentina, and Russia is showing that the fallen can be resurrected. At any rate, those are the rosy messages that appear to be embedded in this spring’s country credit survey.
Institutional Investor’s semiannual rating of global creditworthiness dropped 1.1 points one year ago and 0.8 points last fall. But this time it declined just 0.4 points, settling at 41.1 on a scale of zero to 100. That compares with a 20-year high of 43.4 achieved in September 2000.
Fifty-five of the 151 countries rose at least 1 point - the amount considered statistically significant - and 26 fell by at least that amount. By contrast, last time only 22 rose at least 1 point and 70 fell. Moreover, the 0.4-point overall decline was effectively zero when three factors are considered. First,
this edition of the survey added six low-rated countries - Azerbaijan, Belize, Cambodia, Laos, Macedonia and Mongolia - that collectively brought down the global average. Second, one major U.S. bank instituted a new methodology that lowered its ratings across the board. And third, one country, Argentina, dropped a whopping 10.9 points, losing almost one third of its rating and lowering the overall average. Yet spillover effects appeared to be of the mildest sort: Argentina’s travails (see page 59) led to a modest slide in the ratings of its neighbors and trading partners Brazil (-1.9 points), Paraguay (-1.0) and Uruguay (-0.5). Indeed, the ring fencing of Argentina allowed Latin America’s regional rating to actually rise slightly.
A bubbling up of optimism was evident in the survey. “Six months ago I would have been pretty pessimistic about the prospects for a near-term recovery,” says Jane Edwards, a senior international economist at Lehman Brothers in London. “But more recently, people have been focusing on a global economic rebound in 2003, and in the case of the developed economies, most are expecting stronger growth rates in the second half of this year.” John Krijgsman, senior economist at Canadian Imperial Bank of Commerce, adds: “The big positives are Russia and China. Russia is seen as coming back from the dead, and China is moving forward with the WTO.”
Although economists seem to be increasingly optimistic, those who lend money or buy bonds are troubled by the campaign to apply corporate-style bankruptcy laws to developing countries. The prospect of overturning former Citibank chairman Walter Wriston’s famous justification for LDC lending - countries don’t go bankrupt - struck fear in the hearts of at least some capital providers.
The region registering the biggest increase in creditworthiness was Western Europe, up 1.8 points. Nineteen of the 20 countries in the region rose, while only one fell: Turkey (-1.3). Five of the survey’s top ten gainers were in Western Europe. The regional rating, 84.3, has risen fairly steadily since September 1996 and stands at the highest level in the 23-year history of country credit surveys.
Western Europe’s economy did not prove it could grow when the U.S. was in recession - quite the contrary. Even so, respondents were pleased that the transition to the euro seemed to be going so well. The impact was particularly favorable for smaller countries, which are viewed as standing to get the most benefits from a single currency. Portugal rose 3.5 points, and Austria and Greece were each up 2.6 points. Finland climbed 3.1 points, in part reflecting the strong gains of Russia’s economy on its eastern flank.
Turkey’s well-publicized problems (Institutional Investor, January 2002) accounted for its 1.3-point fall. Nevertheless, the drop was far smaller than the 9.3-point decline in September. Turkey, says CIBC’s Krijgsman, “is seen as having strategic importance, so the situation in Afghanistan means that Western support for Turkey is forthcoming and more generous.”
Eastern Europe rose a barely discernible 0.1 points, with 12 countries moving up at least 1 point while two declined by at least that much. The big news was Russia, up 5.4 points for the largest gain in the survey. Says one Finnish banker, “Recent developments in the economy and the markets have been better than expected, and Russia’s credit fundamentals - political stability, budget balance, current account and foreign reserves - are now in markedly better shape.” A U.S. banker adds: “They’ve got lots of oil, and [President Vladimir] Putin is letting the economy function. Corruption is down, and markets are working better.”
Belarus and Ukraine have long been criticized for staying in Russia’s orbit, but this time it did them some good: The two rose 1.5 and 3.8 points, respectively.
Meanwhile, signs that peace may have broken out in the Balkans boosted not only Yugoslavia (up 1.5 points) but also Croatia (1.1) and even Albania (2.0). Kazakstan was up 1.1 points, presumably because the world needs its oil, and Bulgaria rose 2.0 points because, one hedge fund manager says, the economy seems to be working: “It’s sticking to its knitting and just humming along.”
The usual favorites continued to rise: The Baltics and the Czech Republic, Hungary, Poland, Slovakia and Slovenia all gained, albeit less than in past surveys (reflecting diminished trade with their neighbors to the West). Only Moldova (-2.1) and Georgia (-1.3) registered significant declines. “Moldova is a disaster,” says Firmino de Sousa, chief international economist at Mellon Financial Corp. “It’s the poorest country in Europe. People are emigrating to Romania, which shows how poor it is.” Georgia, he adds, “has a bit of a civil war going on, with Russia supporting a part that wants to be independent.”
Two countries were added to the Eastern European list: Azerbaijan and Macedonia. Both entered in the middle of the regional pack.
The second-largest regional gain was registered by North America, up 1.6 points. The U.S. has once again demonstrated that when it sneezes, well, you know the rest. But America’s neighbors are feeling better now. Canada rose a sizable 2.1 points because, says Lehman Brothers’ Edwards, it’s not only poised to benefit from a U.S. rebound; it’s “a commodities-based economy and could therefore see better terms of trade” as the global economy mends.
Mexico, meanwhile, rose 1.9 points because “inevitably, a U.S. recovery will redound to Mexico’s benefit,” says one U.S. banker. That’s important, he says, because President “Vicente Fox has not been delivering as hoped, though oil is not contributing what it might have, because of lower prices.”
Why did the U.S. gain only 0.9 points amid hints of global recovery? Many economists are troubled that productivity improvements in the booming 1990s are turning out to be much smaller than people had been led to believe. Other structural problems, such as low household savings levels, will reemerge as issues along with expansion. “The imbalance in the U.S. economy raises concern that this will limit the pace of the upswing,” warns one Wall Street economist.
Despite Argentina’s woes, Latin America rose 0.1 points to 35.9. That’s down from an all-time high of 39.2 in September 2000 but still a high note. This was accomplished, moreover, in spite of Argentina’s falling 19.2 points over the past two years, while spiraling downward from sixth to 20th place regionally and from 60th to 99th in the global ranking.
At a press conference in Buenos Aires in April 2000, no less a figure than Citigroup chairman Sanford Weill told reporters that Argentina would be an investment-grade credit within three years. He’s got a year to go on his prediction, but many say Argentina has inevitably reverted to form.
Still, observers say that because Argentina’s collapse was no surprise, its default on its $141 billion in foreign debt caused only minor tremors. Nearby, Bolivia fell because, says one U.S. banker, “the president [Hugo Bànzer] has had cancer and has stepped down, and there is concern about how things are going to move forward.” Jamaica dropped 1.3 points because unrest and fear of flying buffeted the country’s vital tourist industry.
Eleven nations in the region rose 1 point or more. Peru rose a healthy 2.4 points, largely as a result of perceived political changes. “It’s better now that PPK is running the country - at least we hope he’s running it,” says an investment banker and former colleague of Pedro Pablo Kuczynski, the First Boston Corp. alumnus and private equity fund manager who has become minister of the economy and finance in the Alejandro Toledo regime.
The region’s other increases are more difficult to explain. Venezuela was up 1.1 points despite the widespread conviction that lower oil prices and the populist politics of president Hugo Chàvez would harm its economy. A bevy of small Central American and Caribbean nations also rose inexplicably. “Maybe people were just going overboard to show there was no contagion,” speculates one Dutch respondent. One country was added to the Latin list - Belize - whose 35.2 rating was so close to the regional average of 35.9 that it had little impact.
The biggest regional decline was Asia-Pacific’s 3.5-point fall, the region’s third successive drop. Asia-Pacific’s 41.7 rating is well off the high 40s that the region racked up throughout the 1990s. Of course, that was when everyone was convinced that the future was Asia’s. Now, average GDP growth in East Asia is the slowest in 30 years. But at least part of the decline can be traced to the addition of three very low rated countries: Cambodia, Laos and Mongolia.
Not surprisingly, Afghanistan plummeted, but the country was already rated so low that it didn’t have far to fall. The 1.4-point decline knocked nearly 25 percent off its previous rating of 5.9, cementing its lock on last place in the survey.
Nepal registered the steepest decline in the region, 3.6 points, and the fourth-largest drop among all countries. This stemmed mainly from the murders of some royal family members. Taiwan’s 1.9-point slide occurred because of a lack of foreign demand, particularly for semiconductors, as well as domestic demand, notes Enrique Gregorio, head of corporate research at Metropolitan Bank & Trust Co. in Manila.
Malaysia, the Philippines and Thailand all fell as a result of reduced trade and exports and scant evidence that these countries are reducing their dependence on narrow export segments, such as electronics. The sizable Muslim populations in the Philippines and Malaysia also worried some respondents, as did the level of government debt in Thailand and the Philippines - now 65 percent of GDP in both places.
Australia and New Zealand both had strong gains. Like Canada, they are viewed as commodities-based economies that are poised to benefit from global recovery. Hong Kong climbed 1.3 points principally because the Chinese economy is holding up well; China itself moved up marginally, after a 1.2-point drop in the previous six months. South Korea rose 1 point, Metrobank’s Gregorio says, because “even though it is in the midst of a restructuring, the domestic economy is strengthening.” A Hong Kong banker suggests that South Korea’s strength is about the only reason why North Korea rose 1.8 points.
Asia is “in a holding pattern,” says CIBC’s Krijgsman. It has been falling, but “the worst of the news is already out.” Nonetheless, he warns that “uncertainty about how quick the U.S. recovery will be could keep it flat.”
The next-biggest decline - 1.1 points - was registered in the Middle East, as seven countries fell 1 point or more and only one rose by at least that amount. Continued political turmoil not only dragged down the major confrontation states - Egypt, Israel, Jordan and Lebanon - but also several Gulf states. Only Iran moved in the opposite direction, amid hopes of moderation on the part of its regime. The regional rating of 45.8 represents a 2.1-point decline from September 2000, but it is still well above the 36.7 of a decade ago.
Africa soldiered on, barely noticed. Its overall rating was unchanged as the six countries that rose 1 point or more were offset by the four that declined by at least that amount. “I don’t understand why Africa doesn’t keep dropping,” says one British bank country risk analyst. “Things don’t get better, and people are getting sicker. The only good thing is the wars are toned down.” It’s precisely that - a sense of greater political stability despite the dismal economics - that has helped move some ratings up.
Taken as a whole, this latest country credit survey is emphatic in its message: Recovery is approaching. It also suggests that when countries like Argentina and Turkey get into trouble, it need not cause contagion. And Russia’s rating revival attests to how countries can recover from a near-death experience. This message is heartening; the next edition of the survey should reveal how much of it is true.
To view the Country Credit Rating results, please click here or go to the Research & Rankings section of this site.
