There were changes to risk scores in 18 countries during the latest monthly updating cycle of the Risk Briefing model. These led to upgrades of the overall score in only one case, but there were seven downgrades. In the remaining ten cases, offsetting adjustments in the underlying risk categories resulted in no net change to the overall score.
Risk Briefing rates operational risk in 180 markets on a scale of 0-100. The overall scores are an aggregate of underlying scores for ten categories of risk: Security; Political stability; Government effectiveness; Legal & Regulatory; Macroeconomic; Foreign Trade & Payments; Financial; Tax Policy; Labour Market; and Infrastructure. The model is run when events require it, and at least once a quarter for each country.
THIS MONTH’S WINNERS AND LOSERS
|Bosnia and Hercegovina||C||53||C||52|
|NO NET CHANGE|
Tax policy risk
In the latest review of our operational risk model for Liberia the score for one category has improved.
The score for tax policy risk has strengthened by six points to 44. Ellen Johnson Sirleaf, was re-elected in November 2011 and her ruling Unity Party (UP) won a larger share of the vote, increasing its ability to pass legislation. She has reappointed most of her previous administration and judging by actions taken by the new government in its first few months, policy continuity looks assured. As a result, it is unlikely that companies, which have been operating under this administration for several years, will be asked to pay retroactive taxes.
As a result, Liberia’s overall risk score has improved by one point to 56.
In the latest review of our operational risk model for Mali the scores for two categories have been downgraded and the score for a third has worsened.
The security risk score has worsened from 46 to 71. Over the course of the first quarter of 2012, the north of the country has fallen under rebel control after a fragile alliance of Islamists and secular Tuareg nationalists pushed out a weak and ill-equipped military, promting a short-lived military coup in Bamako. The securlar Tuareg Mouvement national pour la libération de l’Azawad (MNLA) has since been marginalised by their erstwhile Islamist allies.
The score for political stability risk has deteriorated by ten points to 50. Social tensions have increased considerably. In Bamako pro-junta and pro-interim government supporters have held rallies. In the north, the attempted imposition of Islamic sharia law by the Islamist radicals has met with widespread protest from local populations. The constitution sets out the process for the transfer of power, but this has been uprooted by the military junta of March 2012, itself replaced by the interim government. A government of national unity is in the process of being formed.
The macroeconomic risk score has worsened from five to 15. The West African franc is fixed to and convertible with the euro through special monetary arrangements with France, pegged at a rate of CFAfr655.96€1. The currency fluctuates in line with euro-dollar movements, but the euro peg reduces the currency’s overall volatility. The political and security crises, coupled with a drought in the Sahel region, have had serious impacts on our growth forecasts. The gold mining sector has been largely unaffected, being located in the south of the country, but overall we see minimal growth in 2012. Resolution, even if partial, of the security situation could, however, see a strong rebound in growth in 2013. A weaker euro-pegged franc as the euro region suffers from recession and the possibility of a break-up of the currency union, and regional food shortages in the Sahel caused by drought, and political instability in Mali will keep price inflation elevated in 2012.
As a result, the overall risk score for Mali has increased by five points to 58.
In the latest review of our operational risk model for Greece the score for one category has deteriorated and another category has been downgraded.
The score for security risk has weakened by four points, to 43. In late June 2012, armed men set the Microsoft office in the Greek capital Athens ablaze by ramming a van full of gas canisters into the building’s entrance. Although nobody was hurt (the attack happened at night) major damage to the building resulted in costs estimated at €60,000. Anarchist and anti-establishment radical leftist group have also in the past attacked symbols of state power (especially the police and government buildings), but also business interests (the stock exchange, banks and other targets). Foreign embassies, including the US embassy, have also been targeted.
The score for government effectiveness risk has worsened by seven points, to 57. The human rights situation in Greece is deteriorating rapidly. Economic hardship and high unemployment (especially among young people) have created a climate in which xenophobic violence and racism can strive. A far-right party that frequently attacks foreigners made great strides at the latest elections in May/June 2012. Right-wing gangs regularly attack migrants and asylum seekers. Moreover, recent legislative changes allow migrants and asylum seekers to be detained on very broad public health grounds. The government is in the process of setting up controversial detention centres for undocumented migrants.
Owing to these score changes, the overall risk score for Greece has worsened by two points, to 49.
Bosnia and Hercegovina
In the latest review of our operational risk model for Bosnia and Hercegovina (BiH) the score for one category has deteriorated.
The score for macroeconomic risk has worsened by five points, to 40. The Economist Intelligence Unit has recently revised down its forecast for real GDP growth in 2012-13, and we now expect real GDP to contract, by 0.2%, in 2012 (instead of our previous forecast of positive growth of 0.3%), to be followed by a modest rebound to 0.8% growth in 2013 (previously 1%). The recovery has been modest because growth in private consumption has been constrained by increased unemployment and by the measures taken to rein in the budget deficit. Several of these factors will continue to restrict growth in the short term, and the need for fiscal consolidation, as required by the IMF, will lead to additional austerity measures to narrow the budget deficit. Economic growth will be further dampened by the recession in the euro zone. The gloomier outlook for real GDP growth is reflected in our new score.
As a result, the overall risk score for BiH has deteriorated by a point, to 53.
In the latest review of our operational risk model for Eritrea the score for one category has deteriorated.
The score for infrastructure risk has weakened by three points, to 78. There is only one railway line in the country. Over half of the line is not in service and the only functioning railway service is between the capital, Asmara, and the port of Massawa. The vast majority of the country is unconnected by rail and there are no ongoing investments to expand the rail network. There are also no international rail links to Eritrea.
As a result, the overall risk score for Eritrea has worsened by a point, to 70.
In the latest review of our operational risk model for India the score for one category has deteriorated.
The score for financial risk has worsened by four points, to 50. Monetary policy has been held tight by the Reserve Bank of India (the central bank) in recent months owing to persistently elevated inflation. Credit markets have remained tight as a result, having a negative impact on the availability and depth of financing. As a result, the Economist Intelligence Unit has revised this score upwards to reflect our latest estimates for availability of financing in the domestic market.
As a result, the overall risk score for India has worsened by a point, to 53.
In the latest review of our operational risk model for Sierra Leone the scores for two categories have deteriorated and one category has been downgraded.
The score for security risk has worsened by three points, to 39. With the November elections approaching, tensions in the country have increased. Ex-soldiers recently attacked the defence minister following a protest over retirement benefits, while the opposition has accused regime supporters of carrying out verbal and violent attacks against it. The opposition has called for the establishment of a UN police force to oversee the elections, and questions have been raised over the police force’s capacity to ensure peace during the elections, particularly if the results are disrupted and the election commission is seen as biased towards the regime. In an effort to respond to the criticisms, the government has launched an inquiry into a spate of police shootings in recent months. Overall, the approaching elections together with a partisan media and deep-seated ethnic divisions in the country mean the risk of violent civil unrest has increased.
The score for government effectiveness risk has weakened by three points, to 82. Doubts have been raised over the security forces’ ability to ensure peaceful elections. The opposition has accused them of being ethnically imbalanced and biased against it, while other observers have questioned their professionalism. The government has launched an inquiry into a spate of recent police shootings and should there be unrest surrounding the upcoming elections, the security forces could be accused of serious human rights abuses.
The score for macroeconomic risk has worsened by five points, to 30. Although on a downwards trend, inflation has not decreased as fast in the first half of the year as initially expected. Average inflation in the first six months was just over 12% and as a result the Economist Intelligence Unit now forecasts average inflation above 10%. The country remains dependent upon food imports and food prices are expected to rise slightly in the second half of the year. A depreciating currency and rising imports for mining-related activities also fuel inflationary pressures.
Owing to these adjustments, the overall risk score for Sierra Leone has worsened by a point, to 58.
In the latest review of our operational risk model for Zambia the score for one category has deteriorated and another category has been downgraded.
The score for government effectiveness risk has worsened by four points, to 68. Recent developments have pointed to an increase in policy risk in Zambia. A number of new regulations have been introduced, with limited private sector consultation, including a 67% increase in the basic minimum wage. Furthermore, the government has proposed a series of revisions to the Companies Act, which include major restrictions on foreign-owned firms, including on their right to borrow funds locally. The revised Companies Bill also gives an unspecified cabinet minister the right to prescribe, by regulation, that a certain sector is not open to foreign investment, and does not explain what would happen if the minister were to nominate a sector in which foreign firms were already present. The Economist Intelligence Unit’s central scenario is that the more radical measures proposed under the new Companies Bill will not get through parliament, but this is not certain.
The score for foreign trade and payments risk has weakened by four points, to 43. Only weeks after the president, Michael Sata, said that the government had abandoned previously mooted plans to restrict the repatriation of profits, senior government officials have indicated that these plans are back on the table. Mr Sata and his government came to power on a mandate of raising the extent to which Zambians (as opposed to foreign investors) benefit from the country’s mineral wealth, and are likely to face continued public pressure to introduce controls on the repatriation of earnings from exports (which consist predominantly of copper). Following recent statements by senior officials, the likelihood of some capital controls being introduced is now high.
Owing to these changes, the overall risk score for Zambia has worsened by a point, to 52.
NO NET CHANGE
The score for security risk has strengthened by four points, to 39. After the widespread unrest in 2011 a measure of calm has been restored. The government has initiated some, albeit limited, political reforms and the ruling party has sought to modernise its internal structures and bring in younger officials in senior positions. Members of the security forces involved in the protests have been sanctioned and discipline has improved. Nevertheless, localised protests and violent demonstrations are recurring and will continue to pose a threat to economic activity in the country.
The score for government effectiveness risk has improved by three points, to 68. The Burkinabe government is seeking to promote the country as a reliable investment destination and has introduced several reforms in the recent past, including the creation of one-stop-shops for business registration, reducing the number of taxes paid, simplifying the payment of taxes, reducing the corporate profit taxes, establishing an arbitration centre for commercial disputes, and revision of its investment code to offer several exemptions and incentives to foreign investors. The country is likely to continue to espouse pro-business policies, not least to promote investment into its promising mining sector. Nevertheless, several issues such as widespread corruption and bureaucratic inefficiencies still hamper investors.
The score for financial risk has worsened by four points, from 46 to 50. The crisis in the euro zone has continued and the Economist Intelligence Unit assigns a 30% risk that the euro zone will break up. Such a development would cause the euro to depreciate sharply against the US dollar and thus put serious strain on the West African franc’s peg to the euro.
The score for tax policy risk has improved by six points, to 19. The corporate tax rate has been lowered from 35% to 27.5% as part of the government’s efforts to promote investment. The total tax rate on companies in Burkina Faso is considerably lower than the average in Sub-Saharan Africa, although administrative burdens still constitute an impediment to business activities in the country.
Owing to these balancing changes, the overall risk score for Burkina Faso stands unchanged at 49.
In the latest review of Finland’s operational risk model one category has been downgraded.
The score for macroeconomic risk has deteriorated by five points to 45. Although not our central forecast, there is a high risk that several countries will be forced to leave the euro zone during the next two years. Even assuming that it survives in its present form, the euro will remain volatile in response to the region’s debt and banking crises. The euro has weakened over the past year, from above US$1.40:€1 in July 2011 to US$1.21:€1 at end-July 2012, as fears over a possible break up of the single currency have triggered flight from euro assets (alongside considerable intra-euro flows from periphery countries to Germany). Given persistent uncertainty over debt sustainability and banking solvency, the euro will remain under pressure, averaging US$1.26:€1 over 2012-16. There are significant risks of sharp movements in either direction.
In spite of this downgrade, the overall risk score for Finland stands unchanged at 15.
In the latest review of our operational risk model for Ireland one category has been downgraded.
The score for security risk has worsened from 18 to 21. The risk of a return to the medium-intensity terrorist campaign conducted by the Irish Republican Army (IRA) in 1970-97 remains low, but has increased in recent months. In July 2012 several dissident Republican groups opposed to the 1998 peace agreement announced they had merged under the banner of the IRA. If central command structure were to emerge these groups could pose a greater threat.
In spite of this change, the overall risk score for Ireland stands unchanged at 28.
In the latest review of our operational risk model for Jordan the scores for two categories have improved.
The score for legal and regulatory risk has improved by two points, to 48. With Jordan recently signing up to a three-year stand-by arrangement (SBA) with the IMF, the government is now committed to a greater measure of fiscal restraint. As part of the SBA, it has agreed to reduce subsidies, a process that has already begun; as such, the Economist Intelligence Unit thinks it is unlikely that the government will repeat the politically-motivated fiscal stimulus that it enacted in early 2011 (which included broadening price subsidies).
The score for macroeconomic risk has strengthened by five points, to 15. The inflation rate has declined more markedly than had been previously envisaged, with the recent hike in electricity and fuel prices having little impact on the consumer price index. We expect consumer price growth to decline further in 2013, as falling global foodstuffs costs, a strong dollar (which will help depress import costs), lower oil prices and a helpful base effect push average inflation to below 4%.
Despite these changes, the overall risk score for Jordan stands unchanged, at 42.
In the latest review of our operational risk model for Niger the score for one category has worsened.
The political stability risk score has deteriorated from 70 to 75. Tensions in neighbouring Mali, where Tuaregs in the north of the country have proclaimed an independent state and Islamist groups have taken control of large swathes of territory, could easily spill over the porous borders into Niger. This may fuel another Tuareg insurgency, as well as facilitate the spread of Islamic terrorist groups such as al-Qaida in the Islamic Maghreb. The unrest has already forced the government to revise its 2012 budget in order to increase its spending on security measures. Moreover, over 50,000 refugees have crossed into Niger putting strain on already scarce resources and potentially triggering tensions with local communities. The Nigérien president’s support for an international intervention in Mali could also provoke a backlash among the Tuareg communities in Niger, which have warned the president of backing any international force against the Tuaregs in Mali.
In spite of this, the overall risk score for Niger stands unchanged at 61.
In the latest review of our operational risk model for Norway, we have upgraded one category, while the score for two others have worsened.
First the upgrade.
The score for macroeconomic risk has improved from 45 to 30. We have revised our forecast significantly based on very positive GDP growth data in the first half of 2012. The forecast in early August 2012 for the year is 2.2%, and for 2013 is 2.3%. The economy is benefiting particularly from the strong offshore sector and private consumption. This offsets some of the negative effects the strong exchange rate is having on mainland exporters. The risk of crowding out has been revised down as public debt is forecast to fall over the forecast period based on a strong economy leading to high tax receipts, and low benefits spending as unemployment is at low levels of close to 3%.
Now the downgrades
The score for financial risk has worsened from eight to 13. The risk of a systemic crisis in the banking sector has been revised up as household debt accumulation and housing price growth present a risk in the medium term. In the near term, banking sector risk is low and the Financial Supervisory Authority continues to work on improving regulation to make mortgage and other lending more secure.
The score for labour market risk has deteriorated from 21 to 29. We have raised the risk that skilled labour will be hard to find from “Very low” to “Low”, due to the very tight labour market with an unemployment rate of close to 3%, which may result in shortages of skilled labour in certain industries. Nonetheless, it is likely that most shortages will be able to be alleviated through immigration. We have raised the risk of difficulties in finding specialised labour from “Very low” to “Low” due to the tightness of the labour market with an unemployment rate of close to 3%. However, immigration of specialised labour is likely to be able to alleviate many of the resulting shortages. Norway also benefits from a highly educated population.
In spite of these changes, the overall risk score for Norway stands unchanged at 12.
In the latest review of Sweden’s operational risk model, the score for one category has worsened.
The macroeconomic risk score has deteriorated by five points to 35. The Riksbank (the central bank) has been reducing interest rates to support the economy from the effects of the euro zone crisis, such as lower export demand and business uncertainty. There is potential for further interest-rate movement in both directions, if the economic situation deteriorates more or if it holds up better than expected. Our forecast at the moment is that in the near term interest rates will remain low both to support the economy and to limit the appreciation of the exchange rate. However, in 2013 we forecast that the central bank will gradually start raising rates as economic growth accelerates.
In spite of this change, the overall risk score for Sweden stands unchanged at 13.
In the latest review of our operational risk model for Switzerland the scores for two categories have deteriorated.
The score for foreign trade and payments risk has worsened by four points, to 11. Although the Economist Intelligence Unit does not expect capital controls to be implemented, the idea has been floated by the Riksbank (the central bank) earlier in 2012 in order to keep the exchange rate from appreciating. The idea has not been discussed further in public since then and we do not forecast that capital controls will be implemented in 2012-13 due to their potential significant side-effects and also because the current exchange-rate ceiling still appears to be sufficient to limit currency appreciation. The central bank appears to be in a position to sustain the exchange-rate ceiling for some time.
The score for labour market risk has also weakened by four points, to 11. We have adjusted this score as part of a global benchmarking exercise. Trade unions in Switzerland are weaker than in other West European countries, but stronger than in countries like the US. About 20% of workers are in trade unions and about half are covered by collective bargaining agreements. Strikes are rare based on a 1937 labour accord, in which unions agreed not to use strikes while employers agreed to use arbitration to settle wage demands. Employees have the right to choose whether or not to join a union.
Despite these changes, the overall risk score for Switzerland stands unchanged, at 10.
In the latest review of our operational risk model for Tunisia the score for one category has deteriorated and another category has been upgraded.
The score for security risk has improved by four points, to 39. Large-scale demonstrations that have the ability to interfere with business activity have died down. However, many parts of the country, especially the south and the west, continue to witness protests as the coalition government has largely failed to reduce the high unemployment rate through the creation of more jobs. In addition, although normal business activity has resumed, the potential for disruption to economic activity by the re-start of large-scale demonstrations remains high.
However, the score for government effectiveness risk has worsened by three points, to 64, based on several incidences of corruption that have come to light in the past few months. Although many cases of corruption have been submitted to the courts, these are not being addressed efficiently as the judiciary still contains members that were appointed by the former president, Zine el-Abidine Ben Ali. It is worth noting, however, that the potential for improvement in the level of corruption in the next five years is good since the new government is likely to make this a priority.
The score for macroeconomic risk stands at 35, owing to some internal adjustments. On the one hand the score for price instability has worsened in anticipation of a further rise in prices. Although our average inflation forecast for 2012-13 is below 5% actual inflation may turn out to be higher than 5% depending on the performance of the Tunisian dinar against other major currencies, especially the euro and the US dollar. Prices have risen in the first six months of 2012 to an average of 5.5% compared with an average of 3.1% in the first half of 2011. The Economist Intelligence Unit forecasts that prices will continue to rise as demand for imports escalates and the dinar depreciates against the dollar. On the other hand the score for interest rate volatility has been altered in line with the money-market rate forecast for 2012-16. We expect the money-market rate to fall slightly in 2012 as the Central Bank of Tunisia follows a loose monetary policy in light of the weak domestic economy as well as the negative impact on Tunisia of the ongoing euro zone debt crisis. From 2013 onwards, the money-market rate will rise consistently for the remainder of the forecast period as the central bank turns its attention to controlling inflation.
Owing to these balancing changes, the overall risk score for Tunisia stands unchanged, at 48.
In the latest review of our operational risk model for Uganda the score for infrastructure risk stands unchanged at 69 owing to conflicting movements in its subcategories.
The score for air transport facilities has deteriorated based on a regional benchmarking appraisal. However, the score for power network has improved. After numerous delays and cost overruns, the Bujagali hydroelectric power station, which came on-stream at the start of 2012, commissioned its fifth and final turbine in mid-June. It is now delivering 250 mw to the national grid, boosting the country’s available supply to around 600 mw. This exceeds the current peak demand of around 450 mw. This will bring a temporary end to the power rationing that blighted Uganda throughout 2011. But with annual growth in energy consumption running at 10-15%, the deficit is set to re-emerge within the next two to three years.
In spite of this, the overall risk score for Uganda stands unchanged at 54.