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Country Credit Ratings 2003

Participants in Institutional Investor's exclusive country credit survey had developed deep misgivings by this semiannual update.

Click here to view the entire 2003 Country Credit ratings results available in the Research & Rankings section of this site.

On second thought, maybe the state of the world isn't so hot after all. Though they gave many national economies an exuberant thumbs-up just six months ago, participants in Institutional Investor's exclusive country credit survey had developed deep misgivings by this semiannual update. Respondents lowered the overall global rating by 0.4 points, to 42.1 on a 100-point scale, reflecting worries about Latin America and the Middle East, offset in part by selective upgrades elsewhere in the world.

Right now the most prevalent attitude is "Wait and see." See about what? "Let's see if two other shoes are going to drop," says a risk analyst at a major financial institution. The first is whether the U.S. will take military action against Iraq, and if it does, what will be the result? The other is the U.S. economy.

Six months ago many respondents to II's poll were convinced that the U.S. was emerging from recession and ready to lift other national economies along with it. Today fears about a double-dip U.S. recession are much more prevalent, costing dozens of countries -- particularly in vulnerable areas like Latin America -- points on their ratings. Some of the countries whose ratings rose, like Russia (see box), benefited from the expectation of oil supply disruptions and higher energy prices, developments that will damage the economies of other nations. Although they will benefit from higher oil prices, Middle Eastern countries' proximity to a potential military conflict undermined their rankings.

The rating of the U.S. itself offers little hint of what may come: It rose 0.2 points.

Still, it's safe to say there's nervousness about where the world's creditworthiness is heading. Overall, 52 countries moved downward by one or more points -- the amount considered a significant change for an individual country -- while just 30 moved up by at least that amount. That's a dramatic shift in sentiment since last fall, when 97 nations saw their ratings rise and only seven experienced a decline of a point or more. (Polling for this survey was conducted in November and December of 2002.)

But if analysts were cutting their ratings almost across the board, they weren't taking an ax to them. Among the 15 biggest decliners were eight Latin nations whose losses were confined to a relatively small three or four points. Most suffered less: Chile lost 1.4 points, and Colombia 1.2. Similarly, on the upside, only five of the 30 gainers rose by more than two points, and the biggest improvement was posted by Belarus, which climbed 2.9 points. "We're just tinkering at the edges," says a New York banker.

To be sure, there were exceptions: Uruguay, which was hit by a brief banking crisis as neighboring Argentineans pulled out their money to address crushing financial problems at home, went into free fall, dropping 10.3 points and lopping one quarter off of its rating.

Virtually all of Latin America shared Uruguay's pain. Eighteen countries in the region fell by at least one point, driving down its overall rating by 2.1 points, to 34.9. That is the same level as in September 2000 -- but still well above the scores tallied throughout the 1980s and '90s.

The best that can be said for Argentina was that it wasn't this survey's biggest Latin disappointment -- it fell only 1.3 points. Of course, Argentina didn't have much left to lose: It has fallen 25.3 points in the past two years, knocking two thirds off its rating and plunging to 24th place in the region. Only Fidel Castro's Cuba stands between Argentina and last place in Latin America. Brazil lost 3.8 points, a reflection of its ongoing economic woes and doubts about the intentions of its new, left-leaning government under Luiz Inácio Lula da Silva (see Latin America II).

Despite the widespread Latin decline, respondents to II's poll insist that they're not painting with too broad a brush. Specific economic problems, they say, afflict the likes of Panama (­2.5), Peru (­2.0), Chile, Colombia and Paraguay (­1.1). These countries "felt not only the weakness in the bigger Latin economies but also continuing weakness from the U.S.," says a New York banker. And some candidates for more drastic reductions didn't do as badly as might be expected. Venezuela fell only a point despite widespread political chaos. Why not a bigger drop? "For Venezuela, oil is always its cushion," says one banker.

The sluggish U.S. economy delivered a double whammy to the Caribbean: fewer tourists (who also may have felt more secure staying home) and less demand for agricultural and manufacturing exports. The Caribbean's biggest losers included Barbados (­4.6), Grenada (­3.6), the Bahamas (­3.4), the Dominican Republic (­3.2), Cuba (­2.0) and Trinidad & Tobago (­1.9). "All of them really are worse off than before," says a New York banker.

The Middle East recorded the second-biggest regional decline in the survey, dropping 0.9 points. In the minds of risk analysts, the area's severe political and security problems seemed to outweigh the positive impact of higher oil prices. The ratings of several prominent oil producers, including Saudi Arabia (­2.0), the United Arab Emirates (­1.8) and Bahrain (­1.5), fell, but Qatar was unchanged and Kuwait nudged ahead 0.7 points despite its proximity to Iraq. Although facing a potentially devastating war, Iraq itself lost just 2.2 points (8.0). Of course, with a rating that's plummeted from the high teens just before the Gulf War of the early '90s and remained at about 10 ever since, Iraq doesn't have much additional room to fall; this spring it's 150th, one slot above last-place North Korea, which dropped 0.6 points to 6.7. Because of sharp differences of opinion on the outlook for the Middle East, there were some anomalies in the latest survey. For instance, Israel fell 2.5 points, as did most of the states nearby, but Syria, with new leadership, rose 2.1 points, its third successive significant gain. Despite making the European Union's accession list, Cyprus (­2.2) lost ground with credit analysts, possibly because they concluded that its growth will be constrained by weaker European economies and uncertainty about the Middle East. Iran, meanwhile, rose 1.5 points. "Makes sense," a London bond manager says, citing improvements in the country's exchange rate policies and its general -- albeit uneven -- economic progress spurred by higher oil prices.

Although resting on a much higher perch than the Middle East, Western Europe dropped almost as much -- 0.7 points. Eighteen of the 20 countries in the region fell, including eight that dropped more than a point. The broad-based declines reflect concerns that many European governments are failing to live up to their EU fiscal obligations and, moreover, that the region isn't generating much growth or expected to get much of a boost from the U.S. anytime soon. Most of the countries, regardless of size, fell midway between France's modest 0.7-point decline and Portugal's more serious 2.6-point drop. The shifts, one banker says, seem to indicate a scaling back of expectations: "People got a little carried away with Euro-euphoria last time, and now they're reassessing a number of countries."

Turkey's rating rose (1.1) even though the country didn't win immediate acceptance to the EU. How did that happen? The country's recent elections gave Recep Tayyip Erdo(breve)gan's Justice and Development Party (AKP) a firmer coalition than any of its recent predecessor governments had. Furthermore, given its strategic significance in the event of a war in Iraq, Turkey is in a strong position to extract financial concessions. (Indeed, after our polling was conducted, the U.S. agreed to accelerate the disbursement of a portion of roughly $26 billion in loans and guarantees to Turkey.) A European banker notes: "The EU may have kept Turkey out, but it feels guilty, and that will be worth something. And the U.S. is on board, helping Turkey with the IMF and such, because it needs Turkey."

Eastern Europe's status rose to its highest level in more than a decade, climbing 0.3 points to a 35.9 average. Eight countries advanced a point or more, while three fell by at least that much. Declines -- several of them less than a point -- were concentrated among what had been the region's better credits: Slovenia (­2.0), Hungary (­0.7), the Czech Republic (­0.3) and the Baltic states (Latvia [­0.9], Estonia [­0.4] and Lithuania [­0.2]). These countries, along with Poland, which rose 0.5 points, are all being "reappraised," says one banker. Because their economies are more mature than some of their counterparts', they're also likely to be most affected by slow growth in Western Europe and the U.S. Croatia (­1.6) and Bulgaria (­1.1) weren't invited into the first group of EU accession states, and thus their ratings lost some ground.

Among the gainers, meanwhile, Russia shows no signs of slowing down. It picked up an additional 2.7 points, the second-biggest gain in this survey. The most recent rise means the country's rating has jumped 15 points in two and a half years, allowing it to leapfrog to the 64th position from 95th in September 2000 -- a tribute to Russia's gains since its disastrous ruble devaluation and default in 1998. "The economic performance is much better," says a German banker, adding, "Its politics seem more stable, and it's selling a higher volume of oil for a higher price." One caveat from a Canadian analyst: "Russia is turning into an oil economy, so what happens if Iraq and Venezuela come back into the market and oil goes to 20 bucks -- will the Russian economy be on the skids?"

Riding Russia's coattails was nearby Belarus, whose 2.9-point rise eclipsed even that of the motherland. The Belarus government has sought to tie its economy to Russia's; as a German banker puts it, "As Moscow goes, so goes Minsk."

Two other parts of the region moved on politics more than economics. Signs of stability in Afghanistan (2.0) helped improve the ratings of neighboring Uzbekistan (1.8), Turkmenistan (1.6) and Tajikistan (0.4). And more-peaceful Balkans helped Macedonia (1.4) and even Yugoslavia, which raters boosted by a full point even though some would argue that the country doesn't exist anymore.

Many respondents seemed to distinguish between Asia-Pacific countries like South Korea (2.6) (see box) and Malaysia (1.5), which have pretty much disposed of the remnants of the 1997 financial crisis, and those like the Philippines (­1.5), which still need to press forward with reforms. On balance, the region rose 0.2 points to 43.3 -- but is still rated below its general level for much of the 1990s. While nine nations rose by a point or more, five fell by at least that much. Even though its political situation is tenuous, Indonesia (1.2) rose on renewed confidence about its economic prospects. By contrast, the Philippines declined because many risk analysts believe that President Gloria Macapagal-Arroyo -- who, just as our polling ended, announced that she won't stand for reelection -- hasn't made as much progress as expected on her original goals.

India's resilient technology industry helped its rating increase by 2.1 points. High tech is seen by respondents as both a vibrant source of trade and investment and an important spur to change India's traditionally dirigiste government policies.

Among the big Asia-Pacific losers? Australia (­1.2) and New Zealand (­1.3), whose prospects have dimmed a bit in the past few months as the conviction has grown that the U.S. and Western European economies are not going to come roaring back soon and lift the region's exports.

Africa also underwent a thorough review, resulting in many individual changes that in aggregate mostly balanced each other out. Its regional rating fell a scant 0.1 points, to 23.5, as eight countries rose and nine fell by one point or more. Onetime favorites Botswana (­2.7) and Mauritius (­2.9), victims of weak European demand for diamonds and other goods, lost ground. Morocco fell 2.1 points on weak tourism and worries about European demand for its exports. By contrast, Algeria rose 1.9 points "because there seems to be some settling down in its domestic political crisis; it benefits from higher prices for its oil and gas; and it's not in the immediate vicinity of any Iraq conflict," explains one analyst. Nigeria rose 2.4 points as a result of higher oil prices.

Meanwhile, two troubled countries, Zimbabwe (­1.1) and Côte d'Ivoire (­0.8), fell less drastically in the past six months after lengthy political problems. As for the rest of the region, "a dozen fairly obscure countries moved up or down a bit for fairly obscure reasons," as one banker put it. Not many analysts track these countries, and interpretations of the limited news coming out of sub-Saharan Africa often vary widely.

Views on Africa may be diverse, but the consensus about the state of global creditworthiness is clear: It's getting worse.


Associate Editor Emily Fleckner compiled the statistics for this feature.

Spotlight on South Korea: Revitalized to tackle new challenges

Take away North Korea and Kim Jong Il, its pariah leader, and South Korea would appear to be assured of a prosperous future. Propelled by a booming economy, the country has risen 5.5 points over the past year in our spring country credit ratings, the second-biggest one-year leap after Russia's 9.5-point climb. Once synonymous with bad credit, South Korea has moved from 34th place to 27th with a score of 68.2, reflecting the country's willingness to embrace reforms and create an increasingly enticing environment for investors. The spring ratings return South Korea to nearly the level of respect it commanded in 1997, before the Asian crisis ensued, when it earned a score of 69.7 and ranked 24th among all countries.

"South Korea's rapid growth and improvement are a remarkable story," says Firmino de Sousa, an international economist at Mellon Financial Corp. And there's more to come, says Bahk Byong Won, the director general for economic policy at South Korea's Ministry of Finance and Economy. He cites deregulation of land use as one possible prod to additional economic growth.

When the 1997 Asian crisis struck, South Korea all but collapsed under a combination of massive external debt, capital flight and a poorly managed banking system. The International Monetary Fund bailed South Korea out by piecing together a $58 billion loan package and administering some tough love, demanding mandatory accounting standards and anticronyism measures; these met with stiff resistance but spurred the dramatic turnaround. At the IMF's insistence, South Korea worked to dissolve the massive chaebol. Those conglomerates, says Kaushik Rudra, Lehman Brothers' director of sovereign strategy for Europe, the Middle East and Africa, have been successfully "scaled down to increase efficiency and eliminate less profitable divisions." Extensive cross-industry job reductions over the past year -- unpopular but necessary -- continue to enhance corporate competitiveness.

The hard work has paid off. Last month South Korea announced reserves of $123.49 billion, just below the country's total current foreign debt. Overall improvements and restructuring in the banking system and within financial and corporate sectors continue to lure investors back. And de Sousa notes that "Korea's exports remain strong despite weakened U.S. and European markets."

But no one can ignore the dark clouds hanging over Seoul as tension over nuclear proliferation escalates between the U.S. and North Korea. The recent strains could undermine political and economic stability in South Korea and sandbag foreign investment and local consumer sentiment. The Finance Ministry's Bahk concedes: "Downside risks are increasing because of the various uncertainties. Both consumers and investors are reluctant to consume and invest. That's the major concern of mine."

Our voters gave their credit ratings at the end of 2002; voters contacted last month concurred that the current uncertainty on the peninsula would result in less optimistic ratings for South Korea if the poll were executed now. -- Emily Fleckner and Donald Kirk


Spotlight on Russia: Putin, oil spark Russian renaissance

High oil prices and a talent for cajoling reforms from reluctant industrial barons are making Russian President Vladimir Putin a very popular man with weary investors. After ten years of recession and falling GDP, his country now boasts an impressive 4 percent growth rate, which helped fuel its surge in this spring's country credit rankings. Jumping 16 places in the past year, to 64th, Russia earns a 41.7 rating from voters, a full 9.5 points higher than in March 2002, making it this ranking's biggest winner in that time. In our semiannual polling Russia rose 2.7 points from September, trailing only the 2.9-point gain by its neighbor Belarus -- underscoring the changes that are afoot in the nation, which one banker referred to as "a former credit nightmare."

A dream for the leader of any petroleum-producing nation, lofty oil prices helped raise reserves from $14 billion at the beginning of 1999 to an extraordinary $50 billion as of mid-February of this year. Putin socked away a further $10 billion in case the country runs into any additional debt repayment expenses that could result from sharp interest rate hikes. Strong oil revenue means more than just robust profits for Russia's energy firms. Kaushik Rudra, Lehman Brothers' director of sovereign strategy for Europe, the Middle East and Africa, estimates that the Russian oil and gas industry accounts for perhaps 60 percent of the country's tax base when all of the ancillary suppliers and businesses are included. This year's outlook is also promising: The U.S. continues to shift oil purchases from Middle Eastern to Russian sources. Rudra, for one, remains unfazed by the prospect that war in Iraq and regime change might trigger a flood of oil onto the global markets, depressing prices. "The upgrade of Iraq's existing infrastructure could take from one year to 18 months," he says.

Russia's slow shift toward economic reform heartened analysts worldwide. Reflecting the sentiments of many investors, one European banker admits that "we don't do a lot of business in Russia now because of mixed experiences in the past," but he notes that "it's a country we're definitely going back into." The decision by Standard & Poor's last summer to hike Russia's long-term debt rating to BB­ from B+ (it was later raised to BB) has fueled expectations that if Putin is reelected, Russia will reach investment grade by 2004. Some voters believe that the extent of any credit upgrade hinges on the degree to which the anticipated reelection delivers the next wave of banking and investment reforms. Recent improvements in governance and transparency encouraged BP to join two Russian producers to create the country's third-largest oil company and cement the biggest oil deal in post-Soviet history. These kinds of reforms persuaded the European Bank for Reconstruction and Development to hint recently that it is ready to revive negotiations with Gazprom to finance the modernization of the company's gas supply system. One voter cautions, however, that capital flight remains a serious concern. -- Emily Fleckner


How Bush's new Millennium Challenge Account will work

After a year's gestation the Bush administration's ambitious plan to remake the way the U.S. tackles global poverty is finally taking shape. President George W. Bush last month proposed legislation outlining how a new, $5 billion aid program, dubbed the Millennium Challenge Account, would be administered. The White House budget submitted to Congress also requested $1.3 billion for MCA in fiscal 2004. Over the next few months, Congress will debate the proposal in hearings that will determine how much MCA ends up helping the world's poorest countries.

The program, first announced by Bush at a United Nations conference in Monterrey, Mexico, a year ago, grew out of a post-9/11 appreciation for the importance of fostering development as an antidote to terrorism and represents a sea change in the U.S. approach to foreign aid.

MCA is no giveaway designed to get countries to join the U.S. in its antiterror campaign. It would provide a total of $5 billion through 2006 and $5 billion a year thereafter, boosting the U.S. foreign aid budget by 50 percent, to $15 billion a year -- the biggest increase in decades. But that money, unlike much existing U.S. aid, would go only to countries that demonstrate high levels of commitment to fighting corruption, promoting political and economic freedom and investing in education and health.

The U.S. hopes that the creation of MCA will spur competition among countries to deepen economic, social and political reform. The benefits of being included in MCA go beyond money. Qualification for the program would send a signal to private investors and donors that the country is on the right track, just as an improving score in Institutional Investor's country credit ranking (story) demonstrates progress in the eyes of risk analysts from around the world.

"We want to reward countries for demonstrating sound policy performance while at the same time challenging countries where performance may be slightly lacking on how you get up to that level and providing an incentive for them to get there," says Clay Lowery, deputy assistant secretary at the U.S. Treasury.

In the first two years of the program, countries with annual per capita income of less than $1,435 could be considered eligible for the money; in the third year more-developed countries, with incomes up to $2,975, would be eligible. The administration would use 16 indicators to measure countries' commitments to democracy, free markets and education and health care. Indicators range from civil liberties ratings by human rights watchdog group Freedom House to World Bank statistics on primary school completion rates. The government has chosen Institutional Investor magazine's semiannual country credit ratings to determine the creditworthiness of countries.

According to a study by Steven Radelet, a former Treasury Department official who is now a senior fellow at Washington's Center for Global Development, as of last month at least 13 countries could qualify for the program in 2004: Albania, Bangladesh, Bolivia, Gambia, Georgia, Ghana, Honduras, Malawi, Mongolia, Mozambique, Nepal, Senegal and Sri Lanka. By 2006 a total of 20 to 25 countries could be eligible. MCA recipients would enter into contracts that could be canceled if they failed to show progress on meeting performance criteria.

The program could provide each country with more than $250 million per year. "For a lot of countries, this could mean a doubling of foreign aid," says Radelet. "The proposed legislation is a good step forward, and the basic idea of giving more responsibility to recipient countries is exactly right."

The future of MCA now depends on the extent to which it is coordinated with existing aid programs in the U.S. and other countries and avoids falling victim to congressional logrolling. "The issue of MCA is how it will be structured and administered," says Isobel Coleman, a senior fellow at the Council on Foreign Relations. "The concern is that it will become the same-old, same-old pork barrel on the international stage because we don't have a mechanism for distributing the money."

Many details of the plan remain to be fleshed out. The White House is proposing that a Millennium Challenge Corp. be set up to administer the program. Its board, chaired by the secretary of State, would include the Treasury secretary and the director of the Office of Management and Budget but, at least for now, no development experts. "We are worried that the three people on the board have little development expertise and that MCA may fracture U.S. foreign assistance programs further," says Radelet.

One potential problem is that MCA could undermine the U.S. Agency for International Development, which administers most U.S. aid programs. "The lack of coordination feeds concern that the administration doesn't support U.S. AID," says Nisha Desai, director of public policy at Interaction, an alliance of U.S.-based development advocacy groups. "MCA works with the few countries that are in the top tier, but the bulk of developing countries are not that easy to work in, and those are the countries with problems where U.S. AID can make a difference."

Observers also question whether Millennium Challenge Corp., which would have a staff of between 100 and 150, drawn from the private sector, government and nongovernmental agencies, could handle the task of running the program. "How can the MCC give away $5 billion a year with only 100 staffers?" asks John Ruthrauff, senior policy adviser at Oxfam America.

Then there's the practical challenge of getting MCA through Congress. MCA's funding request could end up competing with Bush's plan, announced in his January State of the Union speech, to increase spending on HIV and AIDS by $10 billion over the next five years. "You can't squeeze blood from a stone," says one Democratic staffer in the Senate. The expanded AIDS program has the support of Republicans, including Senate majority leader Bill Frist. Congressional aides expect that cuts will be made in U.S. AID's budget to make room for both MCA and increased HIV­AIDS funding.

Capitol Hill watchers expect the authorization of MCA to spark a spirited debate about U.S. foreign aid priorities, especially in light of the likely war in Iraq. Democrats will likely push for congressional oversight of the program and make sure that the corporation is accountable to the Hill. "We would probably want some reporting and would want MCA to be streamlined, effective and cost-efficient," says a Democratic aide.

Despite the challenges, development advocates are optimistic about MCA's prospects and believe that it won't be hijacked by competing interests. "The administration has tied its own hands with a very public list of indicators that focus on development and not other foreign policy goals," says Radelet. The MCA legislation is expected to be approved by May. -- Deepak Gopinath

Click here to view the entire 2003 Country Credit ratings results available in the Research & Rankings section of this site.

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