Country ratings for political/financial risk

RATINGS CHANGES

There were changes to risk scores in 37 countries during the latest monthly updating cycle of the Risk Briefing model. These led to upgrades of the overall score in only four cases, but there were 17 downgrades. In the remaining 16 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

CURRENT PREVIOUS
RATINGS SCORES RATINGS SCORES
UPGRADES
Burundi D 65 D 67
Jamaica C 46 C 47
Haiti D 63 D 64
Egypt C 50 C 51
DOWNGRADES
Lebanon C 51 C 49
Lesotho C 47 C 45
West Bank and Gaza C 57 C 55
Argentina D 61 C 60
Bahrain B 38 B 37
Belarus D 70 D 69
Cape Verde B 37 B 36
Cyprus B 31 B 30
Ecuador D 65 D 64
Iran D 70 D 69
Niger D 62 D 61
Rwanda C 55 C 54
Slovenia B 25 B 24
Sudan D 79 D 78
Taiwan B 24 B 23
Togo C 58 C 57
Venezuela D 75 D 74
NO NET CHANGE
Albania C 54 C 54
Cambodia C 59 C 59
Chad D 66 D 66
Colombia C 45 C 45
East Timor C 52 C 52
Japan B 26 B 26
Kyrgyz Republic D 65 D 65
Libya C 58 C 58
Seychelles C 44 C 44
South Africa C 41 C 41
Spain B 30 B 30
Syria D 80 D 80
Tanzania C 53 C 53
United Kingdom B 26 B 26
Vietnam C 57 C 57
Yemen D 72 D 72

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UPGRADES

Burundi

In the latest review of our operational risk model for Burundi the score for one category has improved and one category has been upgraded.

The score for political stability risk has improved by five points, to 65. In the current political context, the ruling Conseil national pour la défense de la démocratie-Forces pour la défense de la démocratie (CNDD-FDD) is likely to stay firmly in power in 2013-14. The CNDD-FDD has a large majority in parliament and strong control of state institutions and this should not change in the medium term.

The score for macroeconomic risk has strengthened by 15 points, to 40. After remaining fixed at Bufr1230:1US$ between mid-2009 and mid-2011, the Burundian franc was left floating more freely and depreciated to Bufr:1456:1US$ in mid-2012, amid strong inflation and a growing current-account deficit. In 2013-14, the Economist Intelligence Unit expects the Burundian franc to depreciate further, but at a much slower pace. Global exchange rates, which have been highly volatile in recent years owing to uncertainty about the euro, are expected to be more stable as well. Burundi’s inflation rate surged to double-digits in 2012, owing to low domestic food supplies, high international oil and fuel prices, and a one-off increase in water and electricity tariffs. After peaking at 17.5% in 2012, we expect average annual inflation to moderate to 10% and 8% in 2013 and 2014 respectively, helped by a drop in international commodity prices. Lending rates have been highly volatile in 2011-12. While strong inflation has been the main driver of this volatility, seasonal factors, in particular the dependence of Burundi’s financial markets on the requirements of the coffee sector, also contributed. While the latter will keep playing a role in 2013-14, moderating inflation and broad macroeconomic stability will allow for a reduction in lending rate volatility.

Consequently, the overall risk score for Burundi has improved by two points, to 65.

Jamaica

In the latest review of our operational risk model for Jamaica one category has been downgraded and another has been upgraded

On one hand the score for government effectiveness risk has worsened by four points, to 61. The government institutions are slow moving and often lack transparency, and this has a negative impact on government effectiveness and policy implementation. The country has fallen five places, to 90th position, in the World Bank’s 2012 Doing Business rankings. The time taken to file taxes is worse than the regional average

On the other hand the score for macroeconomic risk has improved by five points, to 60. The Economist Intelligence Unit expects the Central Bank to hold its policy interest rate stable into 2013 as inflation falls, and because OECD rates will be held steady. This will help to reduce the level of volatility of commercial lending rates going forward.

Consequently, the overall risk score for Jamaica has strengthened by a point, to 46.

Haiti

In the latest review of our operational risk model for Haiti the scores for two categories have improved.

The score for security risk has improved by four points, to 64. Hostility towards foreigners is mostly targeted at present to the members of the UN peacekeeping force, which has been associated with introducing cholera and some limited human rights abuses. Hostility against other foreigners is not widespread.

The score for macroeconomic risk has strengthened by five points, to 30. Risk of exchange rate volatility is mitigated by the large inflows of external financial aid, from multilaterals as well as governments, as well as charitable agencies. This, along with growing exports, will serve to support the stability of the local currency.

Owing to these positive adjustments, the overall risk score for Haiti has improved by a point, to 63.

Egypt

In the latest review of our operational risk model for Egypt the scores for two categories have improved.

The score for political stability risk has strengthened by five points, to 65. The constituent assembly has completed the draft of a new constitution. There has been a small change to the requirements for presidential candidates (they need the support of 20 members of parliament-MPs- or 20,000 endorsements, rather than 30 MPs and 30,000 as set out in the constitutional amendments passed in March 2011). Overall, most of the changes reflect the popular demands of the anti-Mubarak revolution for limits on the powers of the presidency and the safeguarding of individual freedom

There has been a ten-point improvement in the score for macroeconomic risk, to 50. The Central Bank of Egypt raised interest rates in November 2011, but has maintained them since. Given slow economic growth and slowing inflation, it is unlikely to raise rates again this year. In addition, the expected disbursement of an IMF loan and supplements to foreign-exchange reserves provided by foreign donors should provide some support to the currency, and as such the Economist Intelligence Unit is not expecting any major interest rate hikes to support the Egyptian pound in the coming year.

Owing to these changes the overall risk score for Egypt has improved by a point, to 50.

DOWNGRADES

Lebanon

In the latest review of our operational risk model for Lebanon the scores for two categories have worsened and another category has been downgraded.

The score for security risk has worsened by 14 points, to 68. Sectarian tensions as well as the divide along political lines are increasing as Lebanon becomes more embroiled in the civil war in neighbouring Syria. In addition, the car bomb in the Lebanese capital, Beirut, which killed the security chief, Wissam al-Hassan, has further increased political tensions between the two main factions: March 14th and March 8th. This is likely to lead to protests and an increase in violence, at least until there is a reshuffle in government or Najib Mikati, the prime minister, steps down. As the Syrian civil war spills across the border into Lebanon, political tensions between the two main factions will increase. There have already been several plots to kill influential political figures, with the recent arrest of the former information minister, Michel Samaha, a reminder that tit-for-tat assassinations will continue to rise in the near future (Mr Hassan was assassinated shortly after). Kidnappings of several wealthy businessmen as well as sectarian abductions have been on the rise since the increase in violence in Syria. The widening in the political divide within the country and the war in neighbouring Syria are fuelling these incidents. Responsibility for security within Lebanon is becoming more decentralised, with security organisations aligning themselves with particular sects.

The score for political stability risk has weakened by five points, to 80. The Hizbullah-influenced cabinet is not a consensus cabinet. This is evident in a new electoral law that has been pushed through by the March 8th grouping, of which Hizbullah is a member. The law has been passed by cabinet and is with Lebanon’s parliament for debate. The opposition March 14th say the law is strongly biased towards the Shia Muslim political movement.

The score for macroeconomic risk has deteriorated by five points, to 40. Given the rise in political tensions in Lebanon following the assassination of a top security official in Beirut, and the increased spillover of the Syrian crisis into Lebanon, the macroeconomic situation may deteriorate rapidly. The Economist Intelligence Unit may have to revise down its growth forecasts for 2012, as well as 2013, as Lebanon becomes increasingly embroiled in the Syrian crisis.

As a result of heightened risk the overall score for Lebanon has been revised, to 51.

Lesotho

We have downgraded one category in the latest review of our operational risk model for Lesotho.

The tax policy risk score has deteriorated by 12 points to 31. The risk of changes to the tax regime has increased following the transfer of power earlier this year to a coalition headed by Tom Thabane and the All Basotho Convention. There seems to be considerable support within the coalition for a shift towards a more left-wing or nationalist agenda. On the other hand, Mr Thabane has emphasised that the government will ensure that the business environment stays attractive. The coalition is yet to present a detailed policy agenda and until this is done, the risk of changes to tax policy will remain significant.

As a result, the overall risk score for Lesotho has risen by two points to 47.

West Bank and Gaza

In the latest review of our operational risk model for the West Bank and Gaza one category has been downgraded and the scores for three categories have worsened.

The score for government effectiveness risk has weakened by three points, to 71. Given that the West Bank and Gaza are run by two separate administrations, and that a reconciliation looks some way off (Hamas, which runs the Gaza Strip, boycotted the local elections), the ongoing uncertainty and lack of policy direction will no doubt continue to harm the environment for business. Equally, the poor performance of the ruling party in the West Bank, Fatah, in the local elections further raises concerns about its ability to govern in those areas theoretically under its control.

The score for legal and regulatory risk has worsened by eight points, to 48. We have adjusted this score in line with a wider benchmarking exercise. The country’s present business laws are in part an assortment of legacy laws dating back to before the West Bank and Gaza Strip became autonomous. Given the split status of the two administrations, drawing up and implementing effective competition legislation, based on best-practice, will take time-a situation made all the more difficult by the ongoing fiscal crisis in the West Bank. Under pressure from the fast-deteriorating state finances (and inadequate donor support), the government is trying to rein in its subsidy system. However, the decision at the start of September to hike the price of fuel caused a substantial outcry, with protesters hitting the streets and strikes breaking out. In response, on September 11th Salam Fayyad, the Palestinian prime minister, promised to reverse the fuel price rise by cutting the salaries of senior officials. The climbdown by the Palestinian leadership has led us to revise our assessment that subsidies will be cut back over the next two years.

The score for foreign trade and payments risk has weakened by three points, to 39. Although the West Bank suffers from Israeli-imposed closures and other trade restrictions, it is still at least able to trade with the outside world. In contrast, the Gaza Strip has in effect been subject to an economic blockade (imposed both by Israel and Egypt). However, with the election of Mohammed Morsi (who was a member of the Muslim Brotherhood) as Egypt’s president, it had been thought that Egypt would ease its restrictions on the passage of people and goods out of the Gaza Strip. Although there was indeed a temporary easing, the killing of 16 Egyptian soldiers in August by Islamist extremists whom Egypt claimed at the time had crossed over from Gaza saw this opening reversed. As a result, we now assess that the Gaza Strip is likely to remain subject to considerable trade restrictions on its Egyptian border for the entirety of the outlook period.

The score for financial risk has worsened by four points, to 67. Although the local commercial banking sector is very well capitalised, it remains exposed to the solvency problems of the Palestinian Authority (PA). The PA’s debt to the local financial sector reached US$1.2bn in June 2012, equivalent to some 99% of banks’ equity. With the PA struggling to meet its financial obligations, the risk of a debt default is rising. In addition, the payment of public-sector salaries has fallen behind, putting in jeopardy the repayment of personal loans.

Owing to these adjustments, the overall risk score for the West Bank and Gaza has deteriorated by two points, to 57.

Argentina

In the latest review of our operational risk model for Argentina the score for one category has deteriorated.

The legal and regulatory risk score has worsened by two points to 75. In September the government announced that it would compete in the mobile telecoms market. This raises concerns that the government is seeking to take on the private players in the market, and will be competing on an unlevel playing field. It also raises fears that a similar model will be used in other key sectors.

Consequently, the overall risk score for Argentina has risen by one point to 61.

Bahrain

In the latest review of our operational risk model for Bahrain the score for one category has deteriorated.

The score for labour market risk has worsened from 46 to 54. Although traditionally a financial services hub for the region, and a relatively popular location for Western expatriates to set up their base (especially compared with neighbouring Saudi Arabia), the kingdom’s image has been undermined by the protests and harsh crackdown that ensued in 2011. With protests continuing and no sign of an easing of internal tensions, foreigners will be less willing than earlier to take up a post in Bahrain.

Belarus

In the latest review of our operational risk model for Belarus the score for one category has worsened.

The score for financial risk has weakened by four points, to 79. In the run up to the highly controlled parliamentary election in September 2012, the government boosted real wages significantly and cut the policy interest rate, despite still-high year on year rates of inflation. These are very similar to the policies that produced a severe balance-of-payments crisis in 2011, which shook the foundations of Alyaksandar Lukashenko’s system of rule. As such, they could easily lead again to a widening of the external imbalance, rising downward pressure on the currency and a run down in foreign reserves (which are nevertheless a lot higher than they were after the presidential election in 2012).

Owing to this change, the overall risk score for Belarus has deteriorated by a point to 70.

Cape Verde

The score for one category has worsened in the latest review of our operational risk model for Cape Verde.

The macroeconomic risk score has deteriorated by five points to 15. The risk of interest rate volatility has risen slightly. Interest rates increased in 2012 following a rise in the central bank’s key lending rate, in an attempt to curb the growth in money supply and in domestic credit. Domestic interest rates are expected to ease slightly in 2013, which will result in an average lending rate volatility of 7.5% in 2012-13.

Due to this, the overall risk score for Cape Verde has increased by one point to 37.

Cyprus

The score for one category has worsened in the latest review of our operational risk model for Cyprus.

The political stability risk score has deteriorated by five points to 35. Tensions with Turkey have mounted to a very high level around the issue of who will benefit from the gasfields recently discovered close to the island’s shore. Although the Greek Cypriots are determined to continue exploring and ultimately extract it with foreign companies, the Turkish Cypriots—and Turkey—will resist as strongly as possible. Although a military conflict is rather unlikely, the tensions could prove disruptive to business.

Owing to this change, the overall risk score for Cyprus has worsened by one point to 31.

Ecuador

In the latest review of our operational risk model for Ecuador the score for one category has worsened.

The score for financial risk has deteriorated by four points, to 79. The last formal IFS estimate of the ratio of private claims to nominal GDP from the IMF was 13.72% in 2012. This is not expected to improve in 2012-13. Local financial markets remain shallow, with limited financing options for businesses available. The Economist Intelligence Unit does not expect the current government to enact reforms that will dramatically improve this situation in 2012-13. The government continues to take an interventionist approach to the financial sector but recent legislation is expected to negatively affect lenders’ profitability.

Owing to this adjustment, the overall risk score for Ecuador has worsened by a point, to 65.

Iran

In the latest review of our operational risk model for Iran one category has been downgraded, while another score has deteriorated.

The score for macroeconomic risk has worsened by ten points to 85. Bank Markazi, Iran’s central bank, may be forced to raise rates further in the forecast period in order to arrest the downward trajectory of the Iranian rial. An earlier rate rise in 2012 was ineffective in arresting the depreciation of the currency but it remains one of the few orthodox policy measures available to Iran’s monetary authorities.

The foreign trade and payments risk score has worsened from 93 to 96. Access to foreign exchange is now tightly controlled in Iran. The government has attempted to set up a foreign-exchange centre to act as a central clearing point for companies seeking funds for imports, but the demand placed on the facility has substantially outstripped supply. We expect foreign businesses in particular to be low on the government’s list of priorities in terms of meeting their demands for foreign exchange.

Consequently, the overall risk score for Iran has deteriorated by one point to 70.

Niger

In the latest review of our operational risk model for Niger one category has been downgraded, while another category’s score has worsened.

The score for security risk has deteriorated from 64 to 71. The al-Qaida in the Islamic Maghreb (AQIM), which operates in the borderlands between Niger, Mali, and Algeria as well as the remote hinterlands of Niger, has repeatedly expressed its hostility to foreigners and foreign-owned companies operating in the country. Six humanitarian workers, five Nigeriens and one Chadian, were kidnapped in central Niger by gunmen in mid-October, although the attackers failed to kidnap their alleged target, an Italian non-governmental organisation worker in the area. Six French nationals are held by AQIM in the region, four of whom were kidnapped in Niger in 2010. A French mining company, Areva, whose staff are among the hostages held by AQIM, has raised concern over the security situation in the country on several occasions. AQIM has threatened to attack foreign interests should the international community intervene in neighbouring Mali, which shares a porous border with Niger. The risk of kidnapping has increased following the recent uprising in Mali where Ansar Dine, an Islamist group affiliated with AQIM, has taken control over northern parts of the country. The instability in Mali risks facilitating the spread of terrorist activities and kidnappings in Niger. The gunmen who kidnapped the six humanitarian workers are thought to have originated from the remote areas along the borders with Mali. With France increasingly active in supporting an international intervention in Mali aimed at retaking the northern regions, hostility to foreigners and the risk of kidnappings (which gives the AQIM some leverage) has increased markedly.

The score for labour market risk has worsened from 79 to 82. Public-sector officials, teachers, magistrates, mine workers, taxi and truck drivers have all gone on strike in recent months. The rise in strikes reflects a growing popular frustration with rising prices and low wages. In August, the government raised the minimum wage to CFAfr30,047 (US$57.2) per month but this is unlikely to prevent further labour unrest. With the onset of oil production and mining output rising, popular expectations of higher government spending and a rise in living standards have increased. People’s rising expectations are unlikely to be met in the short to medium term and thus the risk of labour strikes has increased.

As a result of these changes, Niger’s overall risk score has increased by one point to 62.

Rwanda

In the latest review of our operational risk model for Rwanda the scores for two categories have worsened.

The score for political stability risk has weakened by five points, to 60. The latest report of the UN Security Council’s (UNSC) Group of Experts, which was leaked to the international press in mid-October, says that Rwanda and Uganda continue to support the M23 rebellion in the Democratic Republic of Congo (DRC). The Rwandan defence minister, James Kabarebe, has been accused of “commanding” the rebellion in the report. The report also alleged an increase in mineral smuggling from the DRC, jeopardising Rwanda’s mineral tagging system. Rwanda has strongly denied any involvement in the rebellion, but several donors—which suspended aid to Rwanda following the interim report earlier in 2012—have said that decisions about future disbursements will be influenced by the new report. When the report is officially released, donors are likely to announce further suspensions of aid, which typically provides around 40% of the Rwandan government’s revenue. This will expand the public deficit and weaken the currency, pushing up inflation.

The score for foreign trade and payments risk has worsened by four points, to 50. Although all parties are eager to avoid an escalation of the DRC conflict, and the Economist Intelligence Unit believes that a wider intra-regional war will be avoided, the allegations in the new UN report will damage Rwanda’s international standing and could lead to a trade embargo. Rwanda was voted into a seat on the UNSC in October where it will serve a two-year term from 2013-15, which will mean that it can prevent the UN from voting unanimously for sanctions against it. Nevertheless, there is an increased risk that some countries may impose bilateral sanctions over the allegations that it is supporting an armed rebellion in the DRC.

Owing to this change, the overall risk score for Rwanda has weakened by a point to 55.

Slovenia

In the latest review of our operational risk model for Slovenia the score for one category has weakened.

The score for macroeconomic risk has worsened by 15 points, to 45. The Economist Intelligence Unit has revised down its forecast for economic growth in the light of poorer-than-expected national accounts data for the second quarter of 2012, when real GDP shrank by 3.2% year on year. We now forecast a contraction in real GDP of 2% in 2012, followed by a modest rebound, with economic growth of just 0.2% in 2013, as Slovenia’s export-dependent economy benefits from the recovery in demand in the rest of the euro zone.

This has led to a one-point deterioration in the overall risk score for Slovenia.

Sudan

In the latest review of our operational risk model for Sudan the score for one category has improved, another has worsened, while a third category’s score stands unchanged owing to conflicting movements in its subcategories.

The score for financial risk has improved by four points to 75. There have been substantial reforms of the Sudanese financial sector, and the impact of international sanctions has lessened somewhat. However, given the difficult domestic economic and political climate, the central bank will struggle to improve financial sector indicators.

The tax policy risk has deteriorated from 44 to 56. We have adjusted this score as part of a broader benchmarking exercise. Corporate tax varies depending on the sector of operations. Companies engaged in the exploration, extraction and distribution of oil or gas are subject to a 35% rate, plus a 3% social development tax (applicable to all corporates).

The score for macroeconomic risk stands unchanged at 90 due to conflicting movements in its subcategories. On the one hand, the score for exchange rate volatility has improved. After a long period of fixed rates, the central bank has allowed some flexibility in exchange rates. US dollars remain scarce, and the local currency is likely to remain under pressure amid lack of clarity over the resumption of South Sudanese oil exports, and thus a resumption of oil export fees for Sudan. On the other hand, the score for price instability has worsened. Inflation pressures in Sudan remain strong, in part reflecting the impact of a weakening Sudanese pound on the import bill and high energy costs. In addition, food price inflation has tended to spike in response to concerns about political risk, with consumers seeking to stock up on staples when tensions with the south are particularly strong.

As a result, the overall risk score for Sudan has worsened by one point to 79.

Taiwan

In the latest review of our operational risk model for Taiwan the score for one category has worsened and another category has been downgraded.

The score for government effectiveness risk has worsened by four points, to 36. The government of the ruling Kuomintang is broadly pro-business, and is committed to implementing liberal economic policies. However, parts of the local economy remain over-regulated and largely closed to foreign investors. A move to deregulate such sectors might be forthcoming in 2013-14, but powerful domestic protectionist sentiment will oppose such changes.

The score for legal and regulatory risk has weakened by three points, to 23. The government effectively subsidises petrol and electricity purchases by allowing the dominant state-owned energy companies and utilities providers to cover losses between global and domestic market prices. It signalled its intention to liberalise energy prices in early 2012, and gradually remove such subsidies. However, a planned rise in electricity prices scheduled for December 2012 has been pushed back until late 2013. This suggests that such price controls may prove more persistent than previously envisaged.

Owing to these changes the overall risk score for Taiwan has worsened by a point, to 24.

Togo

In the latest review of our operational risk model for Togo one category has been downgraded.

The score for political stability risk has worsened by five points, to 65. Collectif Sauvons le Togo, an umbrella grouping of civil society organisations and opposition parties, and other organisations have spearheaded protests and demonstration in Lomé, the capital, since May 2012. They initially protested against changes to the electoral code ahead of legislative elections and are now calling on the president, Faure Gnassingbé, to step down. Amid rising tensions, the government was replaced and a new government initiated talks with the opposition, but to little avail. Continued demonstrations and protests are expected, especially in Lomé

Consequently, the overall risk score for Togo has deteriorated by a point, to 58.

Venezuela

In the latest review of our operational risk model for Venezuela, the scores for two categories have deteriorated, while another category’s score has improved.

The score for government effectiveness risk has improved from 96 to 93. Under the Hugo Chávez government the state has expanded rapidly, but preference has been given to political affiliation rather than technical capabilities. The quality of bureaucracy across all management levels is poor, but there are a few institutions that still maintain some competency, in particular the Banco Central de Venezuela (the Central Bank) and the Superintendencia Financiera (the financial superintendency).

The macroeconomic risk score has worsened by ten points to 80. The economy has preformed well in the past two years, boosted by high levels of public spending that helped Mr Chávez gain re-election in early October. However, the current pace of growth (around 5%) is unsustainable, as there are not enough fiscal resources to maintain a spending boom, while domestic productive capacity has continued to decrease. As a result we are forecasting growth of under 1% in 2013. The high levels of public spending in the past one-and-a-half years has been accompanied by a very rapid rise in domestic public debt, as the government has placed a large number of bonds in the domestic market. Due to this, there is crowding out of the public sector, with domestic public debt estimated at 72.6% in 2012, as a percentage of M2, with the ratio rising to 82.6% in 2013.

The labour market risk score has deteriorated from 64 to 68. Since the adoption of a new labour reform in mid-2012, Venezuela has one of the most restrictive labour policies in the region and world. The new law establishes a set of regulations for employers that make it much harder to fire employees, as well as providing extended benefits. Moreover, the labour reform touches on the pension system, moving away from an employee-contribution policy towards an employer-funded scheme, which is unsustainable in the medium and long term.

Owing to these changes, Venezuela’s overall risk score has worsened by one point to 75.

NO NET CHANGE

Albania

In the latest review of our operational risk model for Albania the score for one category has worsened.

The macroeconomic risk score has deteriorated by five points to 50. We have revised down our forecast for real GDP growth in light of the poorer-than-expected national accounts data for the first quarter of 2012, when real GDP shrank by 0.2% year on year—marking the first such contraction since the final quarter of 2009. In the light of this result, and the expected recession in the euro zone in 2012, we have revised our forecast for economic growth in 2012 to 0.5% (previously 1.5%).

In spite of this adjustment, Albania’s overall risk score stands unchanged at 54.

Cambodia

In the latest review of our operational risk model for Cambodia the scores for two categories have worsened. One category has been upgraded.

The score for political stability risk has worsened by five points, to 70. Tensions within Cambodia over the government’s land allocation programmes are growing. Those evicted and often inadequately compensated in such disputes and have staged protests, despite efforts by the security forces to prevent them. There is a strong possibility that these tensions and protests will escalate in the next two years, given that the pace of economic development (and thus land evictions) is rising. Tensions are also high within the garment sector, where protests over labour conditions are an increasing source of unrest.

The score for foreign trade and payments risk has weakened by four points, to 36. Cambodia runs a very large deficit on its current account, estimated at the equivalent of over 10% of GDP in 2012. While some of the country’s imports are linked to the pace of export growth, the size of the current-account deficit means that Cambodia would be vulnerable to a sudden drop in capital inflows. In such a circumstance, the government might have little option but to put capital controls in place in order to stop foreign currency (and US dollars in particular) from flowing out of the country and causing massive liquidity shortages in the domestic economy.

The score for macroeconomic risk has improved by five points, to 20. Cambodia’s economic prospects in 2012-13 are strong. Growth is expected to reach 5.8% in 2012 and accelerate to 6.4% in 2013. The rate of economic expansion in 2013 will be supported by stronger external demand conditions, and rapid increases in exports as the country’s garment sector develops. This sector will be one of the key pillars supporting Cambodia’s economic growth in the next two years. Rapid growth in business and infrastructure investment will also serve to boost GDP growth.

Owing to these offsetting adjustments the overall risk score for Cambodia stands unchanged, at 59.

Chad

In the latest review of our latest operational risk model for Chad one category has been upgraded and another category has deteriorated.

The macroeconomic risk score has strengthened by five points to 20. Following a decrease in prices in the second quarter of 2012, our inflation estimate has been revised downward to 5% for the full year. In 2013, annual average inflation is expected to ease to 3.5%. Price stability is supported by, among other things, Chad’s membership of the CFA franc zone. Nonetheless, companies should be aware that official statistics could underestimate actual price changes.

The score for labour market risk has worsened from 68 to 71. Public-sector workers launched a strike in July, complaining that salary increases agreed in November 2011 had not materialised yet. Although private-sector workers were not involved in the dispute, many expressed their support to the strikers. The public-sector strike was temporarily suspended in September, but resumed for three days in October after no solution was found. Amid deteriorating relations between unions and the government, the risk of sympathy strikes from private-sector workers has risen.

Consequently, the overall risk score for Chad stands unchanged at 66.

Colombia

In the latest review of our operational risk model for Colombia the score for one category has improved while it has deteriorated for another.

The score for financial risk has worsened by four points, to 50. Colombia’s financial sector is well-managed but there are persistent concerns about excessive credit growth in the past few years, particularly among consumer segments. The authorities have made some efforts in reducing credit growth but it remained strong by mid-2012. In fact, the continued momentum in credit trends has been a major factor in halting monetary easing, even though the economy has slowed this year and there is some scope for the Central Bank to cut rates.

The score for infrastructure risk has improved by three points, to 53. Colombia has invested heavily in electricity generation and transmission over the past two decades, and it produces more energy than the country consumes. Although rising income will lead to higher consumption (in addition to booming industrial sectors), there is little risk of an energy crisis, especially since there are ambitious plans to expand capacity. In fact, Colombia has plans to become an exporter of energy, with plans to upgrade and build new transmission lines with neighbouring countries.

Owing to these adjustments, the overall risk score for Colombia stands unchanged, at 45.

East Timor

In the latest review of our operational risk model for Timor-Leste the score for one category has improved.

The score for political stability risk has strengthened by five points, to 45. The fact that Timor-Leste passed two important tests of its democratic consolidation in 2012 bodes well for political stability. This year’s presidential and parliamentary elections were both held without any repeat of the large-scale violence that has marred previous elections. The UN’s plans to draw down its stabilisation mission in Timor-Leste also suggest that the risk of major social unrest has moderated.

Despite this change, the overall risk score for Timor-Leste stands unchanged at 52.

Japan

In the latest review of our operational risk model for Japan the score for one category has deteriorated.

The score for macroeconomic risk has worsened by five points, to 75. After five years of significant appreciation as a result of its status as a safe-haven currency, the yen will fall in value gradually against the US dollar in 2013-14. The reversal in fortunes, which should correct the yen’s current overvaluation, will be partly owing to the expected weakening of the country’s current-account position.

Nevertheless, the overall risk score for Japan stands unchanged at 26.

Kyrgyz Republic

In the latest review of our operational risk model for the Kyrgyz Republic the score for one category has worsened and the scores for two categories have improved.

The score for political stability risk has improved by five points, to 50. Despite the Kyrgyz Republic’s sometimes tumultuous post-Soviet political history, two things have happened indicating that constitutional mechanisms for the handover of power are beginning to be established. The first was the handover of power from the interim president, Rosa Otunbayeva, to the winner of the 2011 presidential election, Almazbek Atambayev. The second, more recently, was the rapid establishment of a new coalition government in September 2012, following the dissolution of the previous one in late August over issues of economic policy and accusations of corruption.

The score for financial risk has strengthened by four points, to 75. In the past year the threat of a major devaluation has been attenuated to a degree, despite increased economic volatility internationally, by a reduction in intervention in foreign-exchange markets by the central bank. Although this has been determined in large part by the need to rebuilding foreign reserves (which since November 2011 have grown by around US$115m, reaching US$1.77bn in July 2012), it has allowed a degree of depreciation which reduces the risk of a sharp drop, barring any sharp worsening of domestic economic or external financial conditions.

The score for macroeconomic risk has weakened by five points, to 55. The risk of a recession in 2012, although still not the Economist Intelligence Unit’s baseline forecast, has risen considerably because of a very sharp downturn in economic performance in the first half, when real GDP fell by almost 6%. The main factor was a drop in gold production, in part because of labour disputes. This saw industrial production drop by almost one-third year on year. In addition, household demand was affected by the slowdown and then contraction of remittance inflows, reflecting worsening outlooks in the economies in which many Kyrgyz economic migrants work. Volatility in financial and commodity markets affecting the economies of important Kyrgyz economic partners, notably Russia, could have a negative impact on Russian growth, and so also Kyrgyz exports and remittances.

Owing to these balancing adjustments, the overall risk score for the Kyrgyz Republic stands unchanged at 65.

Libya

In the latest review of our operational risk model for Libya the score for one category has improved.

The score for infrastructure risk has strengthened by three points, to 72. The previous regime had begun work on upgrading and expanding airport infrastructure. The country operates two airlines—Afriqiyah Airways and Libyan Airlines. International carriers serve the capital, Tripoli. Other destinations in the country are not well-connected internationally, however.

Despite this, the overall risk score stands unchanged at 58.

Seychelles

In the latest review of our operational risk model for Seychelles one category has been downgraded.

The score for macroeconomic risk has worsened by five points to 45. Real GDP growth will remain robust over the 2012-13 forecast period, but the economy will remain extremely vulnerable to external global economic conditions. Tourism in particular, the mainstay of the economy, has been affected by the slowdown in Europe. Total numbers continue to grow, with arrivals from the Middle East making up for falling numbers from Europe, but the pace of growth is slowing, causing us to revise down slightly the Seychelles’ real GDP growth forecast. Inflation has jumped sharply in 2012, after averaging 2.6% in 2011, and climbed steadily to 8.9% year on year in June, a 32-month high, owing to the pass-through of higher global food and fuel prices (via a reduction in subsidies), and the depreciation of the rupee, which pushed up import costs. Local petrol prices jumped by 17% in April owing to higher global oil prices, and a 15% rise in power and water tariffs in May further stoked inflationary pressure. Treasury security rates will continue to drift higher in 2012-13, owing to slightly more rapid inflation, but will remain in single digits and we are not expecting any major interest rate volatility. Lending rates, which edged up to 11.5% in the first quarter, will continue to track wider interest-rate trends.

In spite of this change, the overall risk score for Seychelles stands unchanged at 44.

South Africa

In the latest review of our operational risk model for South Africa the score for one category has deteriorated.

The score for security risk has worsened by four points, to 50. The recent strikes were viewed as the worst incidents of state violence in South Africa’s post-apartheid history, when police shot dead 34 miners. With the ruling ANC’s apparent swing to the left and the increased influence of the Congress of South African Trade Unions and the South African Communist Party, combined with the economy’s continued underperformance, there is a risk of further violent demonstrations and confrontation.

Despite this change, the overall risk score for South Africa stands unchanged, at 41.

Spain

In the latest review of our operational risk model for Spain the score for one category has deteriorated.

The score for political stability risk has weakened by five points, to 30. High unemployment, wage cuts and austerity measures have led to increasing social discontent. So far, this has taken the form of demonstrations, the most well-known one being the Indignados movement. However, these will become more and more violent as economic depression and austerity begin to bite. Social discontent has also spilled over to separatist movements in some part of the country.

Despite the adjustment, the overall risk score for Spain stands unchanged at 30.

Syria

In the latest review of our operational risk model for Syria the score for one category has worsened.

The security risk score has deteriorated by three points to 89. There have been increasing attacks on villages on the outskirts of Damascus, the capital, and in the city centre of Aleppo by the armed militia, the Shabiha. The Shabiha, before the start of the civil war, were primarily involved in illegal drug, weapon and tobacco trade, but since the start of the conflict in March 2011 have turned their attention to terrorising the civilian population into backing the president, Bashar al-Assad.

In spite of this change, the overall risk score for Syria stands unchanged at 80.

Tanzania

In the latest review of our operational risk model for Tanzania the score for one category has worsened while it has improved for another.

The score for macroeconomic risk has strengthened by five points, to 30. The Tanzanian shilling has been remarkably stable so far in 2012, fluctuating within a narrow band of Tsh1,570-1,605:US$1. This is in stark contrast to the weakness and volatility that characterised it in 2011, as soaring inflation and wide fiscal and current-account deficits weighed on it. Inflation has moderated and the current-account deficit has narrowed so far in 2012, but both remain high, continuing to weigh on the currency. The impact of these adverse macroeconomic fundamentals has, however, been offset by tight monetary policy as well as confidence in the economy’s prospects. These factors are likely to ensure that the shilling remains relatively stable over the rest of the year.

The score for labour market risk has worsened by seven points, to 68. Access to skilled labour is notoriously poor in Tanzania, largely due to severe deficiencies in the quality of education, as well as a mismatch between available skills and those required by firms. This has been compounded by the recent sharp increase in the price of work permits for expat workers (including citizens of other member states of the East African Community EAC). The average fee for Class B permits (for foreigners employed by a Tanzanian firm) has increased by 33% to around US$2,000—an exorbitant amount for a permit that is typically valid for about two years. Hence, the severe shortage of specialised workers in Tanzania is set to worsen. Fees for Class A permits (for the self-employed, which includes consultants) now range between US$2,000 and US$3,000, up from around US$2,000 on average previously. The hardest hit are foreign workers who fall in the A-1, A-2 or A-3 categories (prospecting and mining; large-scale trade and businesses; lawyers, accountants and doctors), who will have to pay up to US$3,000—the highest rate for any type of permit in the EAC.

Owing to these balancing adjustments, the overall risk score for Tanzania stands unchanged at 53.

United Kingdom

In the latest review of our latest operational risk model for the UK the score for one category has been upgraded and another category has worsened.

The macroeconomic risk score has improved by five points to 60. The underlying trend in the UK is of a stagnating economy or, at best, one barely growing. After an estimated contraction of 0.4% in 2012, we forecast a return to sluggish GDP growth of 0.5% in 2013 and around 1.3% in 2014. But even this anaemic projection may prove optimistic, against the backdrop of protracted fiscal tightening and a risk of renewed financial turmoil and/or unmanaged defaults in the euro zone.

The score for foreign trade and payments risk has deteriorated by four points to 11. We currently assign a 40% risk to one or more euro zone countries exiting the single currency bloc over the outlook period. The consequences of such an outcome would most likely be numerous and unpleasant, and would almost inevitably have a severe impact on the global financial system, as investor anxiety over currency redenomination risk and loan losses triggered a rapid flight to safety. Given the large size of the financial services sector relative to the UK economy, it is quite possible that some form of capital controls would have to be applied in order to prevent excessively disruptive capital flows.

As a result, the overall risk score for the UK stands unchanged at 26.

Vietnam

In the latest review of Vietnam’s operational risk model the score for one category has improved.

The macroeconomic risk score has strengthened by five points to 45. Although the rate of consumer price inflation is now accelerating again, we do not expect to see a repeat of the prolonged double-digit inflation that was seen in 2008 and 2011 in 2013. The government still maintains a bias in favour of economic growth over price stability, but it has also seen the link between periods of rapid inflation and lower consumer spending (and thus slower GDP growth). As a result, we do not expect monetary policy to be permitted to remain so loose that inflation is allowed to accelerate into double digits in 2013.

Despite this change, Vietnam’s overall risk score stands unchanged at 57.

Yemen

In the latest review of our operational risk model for Yemen the score for one category has weakened.

The score for government effectiveness risk has worsened by three points, to 89. The already substantial problems confronted by businesses in Yemen regarding red tape have only worsened under the coalition government. Many ministers are new to their portfolios (and as such are inexperienced), and in-fighting between the two main parties is worsening. As a result, decision-making is becoming increasingly difficult.

Despite this score change, the overall risk score for Yemen stands unchanged at 72.

 

Source: Risk Briefing