Operational world risk ratings review

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RATINGS CHANGES

There were changes to risk scores in 47 countries during the latest monthly updating cycle of the Risk Briefing model. These led to upgrades of the overall score in only 18 cases, but there were 17 downgrades. In the remaining 12 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
Romania B 38 C 43
Kyrgyz Republic D 62 D 64
United Kingdom B 25 B 26
Ukraine D 61 D 62
Turkmenistan D 75 D 76
Togo C 58 C 59
Thailand C 48 C 49
Taiwan B 22 B 23
Moldova C 54 C 55
Laos D 62 D 63
Jamaica C 44 C 45
Hungary B 33 B 34
Georgia C 42 C 43
China C 45 C 46
Cambodia C 57 C 58
Bolivia C 60 D 61
Barbados B 28 B 29
Armenia C 51 C 52
DOWNGRADES
Argentina D 64 D 62
Brazil C 46 C 44
Central African Republic D 68 D 66
Egypt C 58 C 56
Montenegro C 51 C 49
Sri Lanka C 51 C 49
Uruguay C 43 C 41
Angola C 56 C 55
Bosnia and Hercegovina C 53 C 52
Cuba C 54 C 53
Guyana C 50 C 49
Haiti D 64 D 63
Mauritius B 29 B 28
Mozambique C 52 C 51
Puerto Rico B 32 B 31
The Gambia C 57 C 56
Turkey C 48 C 47
NO NET CHANGE
Bahrain B 39 B 39
Burundi D 65 D 65
Cape Verde B 37 B 37
Chad D 66 D 66
East Timor C 52 C 52
Iceland B 28 B 28
India C 52 C 52
Indonesia C 55 C 55
Israel B 31 B 31
Liberia C 56 C 56
Tajikistan D 72 D 72
Yemen D 71 D 71

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UPGRADES

Romania

In the latest review of our operational risk model for Romania, the scores for seven categories have improved.

The score for political stability risk has improved by ten points, to 30. Political stability is set to improve as the economy is forecast to grow this year, the government has relaxed austerity measures and public sector wages have been restored to the level they were at prior to the the 25% cut of 2010. The left-liberal Social Liberal Union government has a strong parliamentary majority, and there is little risk to it from the opposition, as the Democratic Liberal Party will take years to regroup and present a credible electoral challenge.

The score for government effectiveness risk has risen by three points, to 61. Red tape remains a problem and the government could do more to streamline bureaucratic procedures, but this score is in line with the World Bank’s ease of doing business measure.

The score for legal and regulatory risk has improved by five points, to 45. Since Romania joined the EU, property legislation has moved into line with EU Community acquis. Political interference in the judiciary remains a concern, as was demonstrated during attempts to impeach the president, Traian Basescu, in 2012. However, EU scrutiny and further reform of the judiciary have led to improvement. Competition policy is also showing signs or improving, but some sectors, such as the sensitive energy sector, remain partially protected. Western accountancy firms are well represented in Romania and financial and auditing standards have steadily risen. However, not all large firms are audited by reliable auditors and smaller firms may not always be subject to dependable audits.

The score for macroeconomic risk has strengthened by 15 points, to 45. The leu has been subject to great volatility in recent years, mainly because of the impact of the euro zone crisis, but is expected to become more stable in the remainder of the forecast period. Although risks emanating from the euro zone and related contagion effects remain, the economic recovery is forecast to pick up this year, as agriculture benefits from a normal harvest and domestic demand begins to improve. Also, the public debt/M2 ratio is expected to remain relatively low.

The score for foreign trade and payments risk has improved by seven points, to 18. Romania’s membership of the EU and World Trade Organisation minimise deviations from standard tariff rates. The weighted average tariff applied to all products is 1.1% according to the World Bank.

The score for financial risk has improved by 12 points, to 42. Lending to the private sector has risen rapidly in recent years, although it remains below the level of central European countries and far below the levels of western Europe. Romania has a fairly developed leu-denominated fixed rate medium-term bond market.

The score for infrastructure risk has improved by three points, to 38. Air transport facilities in Romania have developed substantially and are adequate for business needs.

Overall, Romania’s risk score has improved by five points, to 38.

Kyrgyz Republic

In the latest review of our operational risk model for the Kyrgyz Republic, the scores for three categories have improved, while another category was downgraded.

The score for political stability risk has deteriorated by five points, to 55. In 2013 the number of clashes with Tajikistan, Uzbekistan and with Kazakhstan over border and ethnic conflicts, as well as over the use of water resources, has escalated markedly. With the imminent departure of US troops from Afghanistan, the risk instability spreading in and through neigbouring countries, especially Tajikistan, has risen.

The score for government effectiveness risk has improved by four points, to 82. As the only country in Central Asia with anything like a democratic polity or political culture in place, the accountability of public officials in the Kyrgyz Republic is a little higher than is typical of the region, and efforts towards progress in this area continue to be made despite difficult social and economic conditions. As a result, its rating was raised to reflect a qualitative difference to regional peers such as Uzbekistan or Turkmenistan, where no mechanisms for the accountability of public officials exist.

The score for macroeconomic risk has strengthened by 15 points, to 35. So far in 2013, inflationary pressures have been weak. Over the remainder of forecast period countervailing factors will be at work. On the one hand, a fall in global prices for food and fuel—both important components of the Kyrgyz Republic’s import bill—will restrain price growth. On the other hand, the pace of nominal som depreciation will be faster than previously assumed. According to the latest information from the IMF, although total public debt in the Kyrgyz Republic is very high, at an estimated 48.9% of GDP in 2012, most of this (45.6%) is external debt. This suggests that public debt was equal to around 3.3% of nominal GDP in 2012 (Som304.35bn). This implies a low crowding out ratio.

The score for infrastructure risk has improved by three points, to 75. The latest figures in the World Development Indicators show a telephone density in the Kyrgyz republic of nine lines per hundred people, putting the country second-to-last in this category.

Overall, the Kyrgyz Republic’s risk score has strengthened by a point, to 63.

United Kingdom

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

The score for macroeconomic risk has strengthened by five points, to 55. Business output and sentiment have improved steadily so far in 2013, driven by private-sector services, and we forecast full-year real GDP growth of 1.2%. A sustainable pick-up is far from assured, however, given the still significant headwinds to growth, and there are clear risks associated with policymakers’ efforts to encourage the UK’s indebted consumers to take on more debt in an environment of record low interest rates and declining real wages. Nevertheless, we anticipate a moderately stronger outturn in headline growth in the run-up to the scheduled 2015 general election.

Overall, the risk score for the UK has strengthened by a point, to 25.

Ukraine

In the latest review of our operational risk model for Ukraine, the scores for two categories have deteriorated, while another category was upgraded.

The score for legal and regulatory risk has deteriorated by three points, to 78. Since President Viktor Yanukovych came to power in early 2010 there has been a progressive as systematic erosion of what little judicial independence existed, including by replacing personnel in top legal institutions with political loyalists and even the “cloning” of judicial institutions as an insurance policy, in case the existing ones somehow evade control. The most conspicuous benefit for the authorities is that it has allowed them to prosecute and jail a number of their political opponents, including Yuliya Tymoshenko, the most high-profile opposition leader.

The score for macroeconomic risk has improved by 15 points, to 60. The two quarters of negative economic growth were in the second half of 2012. Despite our forecast for low rates of growth, our central economic forecasts for 2013-14 do not assume the return to recession.

The score for foreign trade and payments risk has deteriorated by four points, to 61. A range of measures have been undertaken since late 2012 to try to control downward pressure of the de facto peg to the US dollar by administrative means; the most prominent is a rule—introduced for six months in November 2012 and extended for another six months from mid-May 2013—for the mandatory surrender of 50% of domestic exporters’ foreign-currency earnings.

Overall, Ukraine’s risk score has improved by a point, to 61.

Turkmenistan

In the latest review of our operational risk model for Turkmenistan, the scores for three categories have improved.

The score for political stability risk has strengthened by five points, to 70. The Turkmen government continues to pursue isolation from the outside world and an active policy of political repression at home. The opposition, such as it is, remains scattered or cowed. Turkmenistan looks well insulated from the wave of political democratisation that swept the Middle East and North Africa (MENA) in 2011. The maintenance of an extensive subsidy system for the population reduces social discontent, and there seems little prospect of radical Islam gaining a foothold. The authorities’ control over political, media and religious freedoms is much tighter than in MENA, which could curb the potential for upheaval. The entry of a new party into parliament is unlikely to signal a gradual move towards greater political pluralism. We expect that the authorities will do their best to ensure that the election in December is neither free nor fair.

The score for foreign trade and payments risk has strengthened by four points, to 82. Turkmenistan’s financial system is both underdeveloped and highly isolated from the global trends, so that the direct risk of contraction from turbulence on international financial markets is minimal—although there is some threat from the impact that this might have on commodity prices. However, like other hydrocarbons exporters in the region it has probably built up considerable financial reserves—in its case, since the start of gas exports to the new and important Chinese market. In most circumstances, these funds should be sufficient to deal with all but the most severe crisis, for as long as high volume gas exports continue and gas prices remain high.

The score for infrastructure risk has improved by three points, to 72. According to the latest data from the World Development Indicators, the density of fixed-line telephones in the country in 2011 was 11 per hundred people, which pushes it into a score of middle-ranking in this category, though only just.

Consequently, Turkmenistan’s overall risk score has improved by a point, to 75.

Togo

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

The score for financial risk has improved by four points, to 63. Borrowing by the private sector has expanded steadily in recent years in tandem with an acceleration in the rate of economic growth. Total domestic credit to the private sector is estimated to have climbed to 37.6% of GDP in 2013. Despite this slight improvement, financial deepening continues to be held back by structural weaknesses in the banking sector, especially since two of the four ailing state-owned banks have yet to be privatised, almost two years after tenders for private sector participation were issued.

The score for infrastructure risk has strengthened by three points, to 72. The telephone network for landlines is poorly developed outside major urban centres and proves inadequate for business needs; according to the World Bank World Development Indicators, there are only 39 telephone mainlines per 1,000 inhabitants. However, the mobile phone market is much more dynamic and has expanded rapidly, driven by strong competition between the incumbent phone company and a private provider, Moov. The mobile phone penetration is over 50% of the population and is set to rise further throughout the 2013-14 forecast period.

Overall, Togo’s risk score has strengthened by a point, to 58.

Thailand

In the latest review of our operational risk model for Thailand, the scores for three categories have improved, while deteriorating for one other.

The score for legal and regulatory risk has strengthened by three points, to 55. Thailand’s intellectual-property (IP) protection remains poor. Regulations are not strictly enforced, and the government has failed to address the issue in a sustained manner. Nevertheless, there have been recent improvements. Seizures of counterfeit goods are intensifying, and the government is setting up a new Operations Centre for the Suppression of IP Infringement, under the Department of Commerce, to drive progress. The government has labelled 2013 the “Year of IP protection” and has set the goal of being removed from the US’s watch list of the worst intellectual-property infringers.

The score for foreign trade and payments risk has improved by three points, to 43. The country’s current account is fully convertible and almost all capital flows are free, although the central bank has temporarily imposed capital controls in the past in order to stem a sharp appreciation of the baht. Nevertheless, even in a financial crisis, foreign direct investors are unlikely to be denied access to foreign exchange for trading purposes.

The score for labour market risk has deteriorated by four points, to 54. Although both freedom of association and collective bargaining are permitted under the 2007 constitution, both are limited in law and in practice. For example, many types of public-sector workers do not have the right to form trade unions, and only large unions can engage in collective bargaining. The large numbers of violations of labour rights in 2012 point to a risk that freedom of association and the right to collective bargaining will not be respected.

The score for infrastructure risk has improved by six points, to 53. According to World Bank indicators, Thailand’s mobile penetration rate in 2011 was 112%. It is likely that the prevalence of mobile phones increased in 2012 and will continue to rise. This trend points to a low risk that the telephone network will prove inadequate to business needs. Additionally, in early 2013 the government unveiled plans for major spending on new infrastructure projects, including expansion and improvement of road networks. As a result, the extent and quality of road transport is set to improve, reducing the risk of road networks proving inadequate to business needs.

Consequently, Thailand’s overall risk score has strengthened by a point, to 48.

Taiwan

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

The score for legal and regulatory risk has remained unchanged, at 23, owing to conflicting movements in its subcategories. A handful of high-profile court cases brought against political figures in recent years were criticised by some groups as reflecting the politicisation of the local judiciary. The most notable of these cases was that against the former president, Chen Shui-bian of the Democratic Progressive Party, who was imprisoned on corruption charges. However, such criticism appears ill-founded, and it seems more likely that the courts are simply taking a more assertive stance on tackling official corruption. A number of figures from the ruling Kuomintang were tried and found guilty of corruption in 2012-13, suggesting that the courts system does not act especially favourably to the governing party, although occasional distortions still persist. On the other hand, the government is committed to a pro-liberalisation economic agenda that includes the signing of free-trade pacts with international partners. However, its rhetoric has generally failed to match implementation, and with its political standing likely to be relatively weak in 2013-14, it may struggle to enforce liberalisation measures in the face of domestic opposition. Whether a services trade pact signed with mainland China in June 2013 is able to progress through parliament will be a key test in this regard. Regulatory barriers remain in sectors such as pharmaceuticals and retail, and state-owned firms still play a major role in financial services and energy.

The score for tax policy risk has strengthened by six points, to 13. The current government has simplified the tax regime since coming to power, notably by reducing the corporate tax rate to 17% in 2010, from 25% previously. Taiwan does have fiscal weaknesses stemming from its relatively narrow revenue base, but the government’s pro-business stance suggests that major tax changes are unlikely in the coming years. In June 2013 the government withdrew a capital gains tax introduced at the beginning of 2013, which will now be re-introduced in a watered down form in 2015. The move suggested it has little appetite to face down opposition to tax-raising measures. Some adjustment to the value-added tax regime may be made.

As a result, Taiwan’s overall risk score has improved by a point, to 22.

The government is committed to a pro-liberalisation economic agenda that includes the

Moldova

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

The score for government effectiveness risk has remained unchanged, at 71, due to conflicting trends in its categories. In early March 2013 the pro-Western government of the three-party Alliance for European Integration lost a no-confidence vote in parliament when one of its members, the Democratic Party (DP), broke ranks and sided with the opposition Party of Communists. The government was dissolved a few days later and a new one has yet to be appointed. There is an increased chance that the parties of the centre-right will be unable to form a new administration and that a fresh election is held. In the wake of a steep economic downturn, the Communists could increase their representation in such an election—conceivably enough to form part of a coalition with other parties (possibly the DP). This would come at the cost of a step back from the previous government’s liberalising stance. On the other hand, the level of paperwork and time delays related to business practices have come down progressively under the centre-right coalitions that were in power since 2010, mostly as part of their reform efforts in pursuit of EU integration, which is likely to lead to a deep and comprehensive free-trade deal and political association in November 2013. Moldova rose three places (to 83rd out of 185) in the World Bank’s latest Doing Business report, with some marked improvement in the area of investor protection.

The score for macroeconomic risk has strengthened by five points, to 35. So far in 2013 the economy has shown some signs of recovery, especially in trade. Industrial production recovered in the first quarter, but industry is likely to suffer from a deterioration in growth prospects in the euro zone, and in Russia. Despite a slight worsening of the external outlook of late, the slide into recession last year means that the low base could see growth of 2.5% this year, with only modest improvement in the following year linked to a weak recovery in the EU.

Consequently, Moldova’s overall risk score has strengthened by a point, to 54.

Laos

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

The score for financial risk has strengthened by four points, to 71. The ratio of domestic credit to GDP in Laos is rising. The latest available data suggest that this ratio rose in 2011, compared with 2010, approaching 25%. This suggests that the depth of financing is improving.

The score for infrastructure risk has improved by six points, to 78. According to the latest available data from the World Bank, the mobile-phone penetration rate was 87.2% in 2011. Although land-line connectivity remains limited, the prevalence and rapid growth of mobile communications warrants an improvement in Laos’s score on this indicator.

Overall, Laos’ risk score has strengthened by a point, to 62.

Jamaica

In the latest review of our operational risk model for Jamaica, one category has been upgraded, and the score for another has strengthened, while deteriorating for two others.

The score for government effectiveness risk has improved by seven points, to 54. Corruption exists in Jamaica but is relatively moderate. In Transparency International’s Corruption Perception Index Jamaica is placed in the mid-range of countries, ranking 83rd out of 175 countries. There have been some allegations of misconduct by public officials recently, but there have been no prosecutions. Additionally, there are no widespread complaints about human-rights abuses. Those that occur are related to police actions against criminals and organised crime groups. There is an outstanding investigation under way related to a large-scale crackdown and subsequent arrest of a notorious drug dealer and crime boss in 2010, which led to violence and the death of 72 civilians.

The score for financial risk has strengthened by four points, to 63. The large current-account deficit sustains pressure on the currency exchange rate. However, Jamaica’s dollar has weakened considerably in 2013, and the current-account deficit is expected to contract some in 2013-14. This, together with inflows from multilateral lenders, means that rate of currency depreciation is likely to slow going forward.

The score for labour market risk has deteriorated by three points, to 46. Firing restrictions are moderate in Jamaica. However, the cost of firing is relatively high by international comparison, at 62 weeks of wages according to World Bank indicators.

The score for infrastructure risk has worsened by four points, to 38. The number of Internet users per 100 inhabitants is moderate, at 31.5, according to World Bank indicators. This means that lack of information technology penetration will sometimes be an obstacle to business.

Overall, Jamaica’s risk score has strengthened by a point, to 44.

Hungary

In the latest review of our operational risk model for Hungary the score for one category has strengthened.

The macroeconomic risk score has improved by five points to 65. The government’s energy price cuts at the beginning of the year have helped to keep inflation subdued through to June, adding to deflationary pressure caused by weak demand on the back of a struggling economy and elevated unemployment. As a result, we have lowered our inflation forecasts for 2013 and 2014, and now expect consumer price inflation to average 2.2% this year and 3.1% next.

Consequently, the overall risk score for Hungary has strengthened by one point to 33.

Georgia

In the latest review of our operational risk model for Georgia, the scores for three categories have strengthened, while another category was downgraded

The score for security risk has improved by three points, to 43. The territories of Abkhazia and South Ossetia remain occupied by Russian troops and have declared independence. However, the likelihood of renewed conflict between Georgian troops and either Russian forces or local paramilitary groups in the territories has fallen slightly. Formal diplomatic relations have not been restored, but the government of the prime minister, Bidzina Ivanishvili, has increased engagement with Russia and the latter has lifted a number of trade restrictions. Mr Ivanishvili has stated he intends to increase contact with the de facto authorities in South Ossetia and Abkhazia.

The score for macroeconomic risk has strengthened by five points, to 40. We forecast that volatility of the lending rate will be low in 2010-14 at 4.8%. Risks are orientated towards the downside owing to the large current account deficit which could put pressure on the currency and impact interest rates.

The score for foreign trade and payments risk has improved by three points, to 36. The risk of a trade embargo has diminished slightly as Russia has lifted restrictions on some Georgian products, including wine and mineral water. There remains a risk that these restrictions could be imposed once again as diplomatic relations remain tense.

The score for labour market risk has deteriorated by three points, to 32. The government is in the process of amending the labour code to strengthen the rights of employees. The existing labour code is widely viewed as providing too little protection to workers. However, business groups including the American Chamber of Commerce have criticised the draft amendments, saying that they would reduce employment flexibility. It is expected that a compromise document will be adopted and labour laws will remain comparatively business-friendly.

The score for infrastructure risk has remained unchanged owing to conflicting movements in its subcategories. Whilst air transport facilities are broadly adequate to business needs, some infrastructure is outdated and needs to be replaced. In July 2013 Georgian Airlines threatened to suspend flights to the capital, Tbilisi, if the government did not improve the quality of air traffic control. The airport reportedly lacks the latest automated systems. In view of this, the score for airport infrastructure risk falls one place from one to two. On the other hand, telephone penetration has increased in recent years and as a result the risk that telecommunications will be inadequate to business needs has declined slightly. According to the World Bank, in 2011 there were 311 landlines and 1023 mobile phones per 1000 people.

Overall, Georgia’s risk score has improved by a point, to 42.

China

In the latest review of our operational risk model for China, one category has been upgraded.

The score for infrastructure risk has strengthened by six points, to 38. Retail and wholesale logistics networks continue to improve, owing to policy support and massive investment, as well as the development of nationwide retail chains. Nevertheless, the system remains immature. Distribution networks are often only effective within regions, such as provinces, and rural networks are patchy in many parts of the country. High levels of investment have led to significant jumps in railway standards and coverage, particularly with the development of high-speed rail on the passenger network side. Rail freight requires further development, however, as the system tends to prioritise coal shipments, which can clog up the network.

Overall, China’s risk score has strengthened by a point, to 45

Cambodia

In the latest review of our operational risk model for Cambodia, the scores for three categories have improved, while deteriorating for two others, and one category has been upgraded.

The score for political stability risk has improved by five points, to 60. Although the Cambodian government is largely unaccountable, there are some restraints on executive power. These include foreign influence, which is supported by the government’s dependence on foreign aid and loans. The legislature has the ability to limit executive discretion, although its influence is minimal in practice.

The score for government effectiveness risk has deteriorated by three points, to 89. The government’s policies are inconsistently liberal, open and pro-business, in the sense that a level playing-field is rarely enforced. This applies in particular to issues around the use of land and awarding of contracts for large-scale urban development or plantation agriculture.

The score for foreign trade and payments risk has strengthened by three points, to 36. Although credit growth is excessively rapid, the current risk of a financial crisis is moderate rather than high. Rapid GDP growth has improved sovereign risk indicators. Strong inflows of foreign funds support the public finances and balance of payments. Although the economy is over-dependent on the garment sector, significant financial assistance would be forthcoming in the event of a crisis.

The score for financial risk has improved by four points, to 71. The stock of domestic credit is rising rapidly, with credit growth surging by 53% in 2012. This reflects a process of rapid financial deepening that will continue for years to come, although the rate of credit expansion will slow.

The score for labour market risk has strengthened by four points, to 71. Cambodian trade unions are generally free to organise and campaign, especially in the garment sector. Their rights are supported by a network of active NGOs in the country as well as foreign investors and buyers, who exert pressure on the authorities to meet basic standards. However, trade unions remain subject to widespread intimidation by the security services and employers.

The score for infrastructure risk has deteriorated by three points, to 72. The government has plans to expand airport facilities, but it remains unclear when this will occur. In the meantime, ageing air-transport facilities are inadequate and air freight capacity is extremely limited.

Overall, Cambodia’s risk score has strengthened by a point, to 57.

Bolivia

In the latest review of our operational risk model for Bolivia, the scores for four categories have improved, while deteriorating for one other.

The score for security risk has strengthened by three points, to 54. Violent demonstrations and widespread social protests have been a common feature of Bolivia’s political scene for decades, and between the late 1990s and mid 2000s it was a destabilising factor. Although the current Morales administration has faced a wide set of protests, political stability and security have not been severely affected primarily due to very fast economic growth, reductions in poverty levels and unemployment, and the government’s rising social transfers.

The score for political stability risk has improved by five points, to 55. Economic indicators have improved substantially over the past six years, with unemployment and poverty falling considerably, and to a lesser extent inequality. The government’s very strong fiscal and external position has also allowed it to put in place ambitious social and infrastructure programmes, supporting the popularity of the president, Evo Morales. There are still regional tensions and deep ethnic/economic divisions in the country, but the risk of significant social unrest at a nationwide level has reduced.

The score for government effectiveness risk has deteriorated by four points, to 75. Bureaucratic procedures are very tedious at all levels and can prove very time-consuming and costly for businesses. The administration’s policy to expand the role of the state in a number of different sectors has aggravated the situation, particularly for sectors such as mining, agriculture and the financial industry. In the latest World Bank ease of doing business index, Bolivia ranked 155th out of 185 countries.

The score for foreign trade and payments risk has improved by four points, to 46. According to the latest World Bank data, Bolivia’s weighted average tariff stood at 3.7% in 2011, and there have been no significant changes in policy since then. Bolivia’s eventual entry into the Mercado del Sur (Mercosur, the Southern Cone custom union) will not raise the tariff rate substantially either. In fact, it might liberalise some items.

The score for infrastructure risk has strengthened by three points, to 72. According to the 2011 data from the World Bank, Bolivia had 87.1 telephone mainlines per 1,000 people, and 828 mobile phones per 1,000 people. As in other countries in the region, mobile phone penetration will continue to rise substantially into the medium term, while fixed-line penetration is set to stagnate. In Bolivia’s case the uptake of mobile technology will be slightly hindered by a difficult geography and still low investment in telecommunications.

Consequently, Bolivia’s overall risk score has improved by a point, to 60.

Barbados

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

The score for financial risk has strengthened by five points, to 33. According to the most recent IMF International Financial Statistics data, private claims relative to nominal GDP are over 80%, indicating a deepening of the financial sector. This is in line with the World Bank data, which are used for guidance.

Consequently, the overall risk score for Barbados has improved by a point, to 28.

Armenia

In the latest review of our operational risk model for Armenia, the scores for three categories have improved, while worsening for one other.

The score for security risk has improved by seven points, to 39. There was no evidence of xenophobic or anti-business rhetoric during the most recent wave of protests which took place after the presidential elections in February 2013. The opposition’s presidential candidate, Raffi Hovannisian, who led the protests, has in the past criticised monopolistic practices and the dominance of Russian investors in Yerevan (the capital), but this time the protests were free of such criticism. These political protests were far less violent than in 2008. Additionally, the latest data suggest a fall in violent crime; 2.5 homicides per 100,000 occurred in 2010. According to the latest World Bank data, just 0.6% of sales were lost due to theft, robbery, vandalism and arson.

The score for government effectiveness risk has strengthened by three points, to 68. Armenia has introduced some measures to reduce the bureaucracy associated with starting a business. As a result, the country has moved from 55 to 32 in the World Bank’s Ease of Doing Business index. This rise was in part a result of a reduction in red tape for construction permits and increasing the transparency of business regulations.

The score for macroeconomic risk has deteriorated by five points, to 30. The latest actual and forecast data suggests that price instability has increased moderately. The Economist Intelligence Unit’s inflation forecast in 2013 is 5.4% and in 2014 is 4.8%. Risks to this forecast are orientated towards higher inflation owing to gas import price increases, which may be passed on to consumers.

The score for infrastructure risk has improved by three points, to 69. The latest data indicate that mobile phone penetration has increased. According to the World Bank there are now 1,036 mobile phone subscriptions per 1,000 people. Foreign investment in Armenia’s telecommunications industry increased in 2012 with the entry of Rostelecom, a Russian telephone service provider, which should improve the quality of the telecom infrastructure.

Overall, Armenia’s risk score has strengthened by a point, to 51.

DOWNGRADES

Argentina

In the latest review of our operational risk model for Argentina, the scores for five categories have worsened, while strengthening for one other.

The security risk score has deteriorated by four points, to 43. The change in score reflects an update in the guidance rather than an increased risk of terrorist attacks causing substantial disruption to business operations. There are no large domestic terrorist groups operating in Argentina, but the US National Counterterrorism Centre in its 2011 report notes two low level attacks (with no injuries) by two different new, small anarchist groups using improvised explosive devices. Argentina has one of the largest Jewish populations in Latin America (roughly 200,000). In the early to mid-1990s, there were two major terrorist attacks, including a bombing of the Israeli embassy and the other a Jewish centre, killing 85 people. The tri-border area (along the border with Paraguay and Brazil) is thought to remain a centre of drug- and human-trafficking and other transnational crime, and is difficult to police. It is widely suspected that some Islamic terrorist organisations have used the area to fund activities and/or plot attacks in the Americas.

The score for macroeconomic risk has worsened by five points, to 85. Official data shows consumer price inflation at roughly 10% in June, but these figures are widely discredited. The Economist Intelligence Unit has begun to use data from PriceStats, an internet price monitoring company, as the basis for our forecasts. According to these data, which are roughly in line with provincial and private estimates of inflation in Argentina, consumer price inflation is running at roughly 20% currently. Temporary price freezes have brought this down from 25% in 2012, but once the freeze is removed inflation will trend back up in 2014.

The score for financial risk has deteriorated by five points, to 63. Although not our baseline forecast, we now view the risk of a major devaluation as very high. The currency is significantly overvalued after several years of double digit inflation that has caused sustained real peso appreciation. Pressure for a currency adjustment is evident in the black market exchange rate, which has depreciated rapidly in the past year, to around Ps8.5:US$1 at end-June. This represents a black market premium of around 60% on the official exchange rate, which is maintained by increasingly harsh capital, import and foreign-exchange controls. Rapid growth in credit in the past two years has pushed the ratio of domestic credit to the private sector to GDP back above 15% after a steep decline in the aftermath of the 2001 economic crisis and persistently weak growth relative to GDP in subsequent years. That said, at 17.9% of GDP in 2012, the private-sector credit to GDP ratio still remained very low, suggesting limited availability of financing in the local market. According to the World Bank, market capitalisation as a percentage of GDP was just 7.2% in 2012; the value of trade to GDP was 0.3% in the same year, while the turnover ratio was 3.8%. These data imply that the stockmarket is very illiquid. There has been a shortage of new listings in the past decade, and the loss of an important institutional investor base following the nationalisation of the private pension system has been a hindrance to growth of the stockmarket.

The score for tax policy risk has deteriorated by six points, to 69. The change in score reflects new guidance that incorporates the total tax take rather than the corporate tax rate alone. The corporate tax rate itself is moderate, at 35%. However, the total tax rate as a percentage of commercial profits is an extremely high 108% according to the Bank’s World Development Indicators (WDI). This is reflective of the fact that the tax system remains extremely complex and burdensome.

The score for labour market risk worsened by four points, to 61. According to the WDI, firing costs were equivalent to 95 weeks of wages, which is very high by international comparison and suggests that restrictive labour laws strongly impede flexibility in business operations. Reforms to increase labour market flexibility remain extremely unlikely in the remainder of President Cristina Fernández de Kirchner’s administration.

The score for infrastructure risk has improved by three points, to 50. A recent survey suggests that power cuts were less frequent than the Latin American average, though losses due to electrical outages were higher, and the percentage of firms identifying electricity as a major constraint, at 43.3%, was higher than the Latin American average. Power cuts tend to occur during peak winter and summer months. When this happens, residential users are given priority over business. This has caused some industrial users to resort to generators. Other businesses plan downtime around these times. Reflecting the freezing of tariffs since the 2001 crisis, the finances of the electricity companies are so precarious that the government was forced to intervene in 2012. Meanwhile, a steady decline in oil and gas output in the past decade amid an unfavourable domestic pricing environment has persisted. This continues to raise dependence on imports, and heightens the risk that power shortages become more frequent and more severe, with a strong impact on business activity.

Overall, Argentina’s risk score has deteriorated by two points, to 64.

Brazil

In the latest review of our operational risk model for Brazil, the scores for five categories have worsened, while another category was upgraded.

The score for security risk has deteriorated by seven points, to 46. Although the huge protests of June 2013 are dying down, the potential for further unrest, some of which may be violent and result in costs to business in specific locations, will persist through to the October 2014 elections. While possible protests over government ineffectiveness are on the whole peaceful, the risk of vandalism and looting by small groups by remains. Foreign companies are not being targeted specifically, unlike private property, including banks.

The score for political stability risk has worsened by ten points, to 35. Brazilians engaged in massive protests in June over corruption and the poor quality of government effectiveness. As the underlying causes are unlikely to be addressed in the short term, renewed street protests are quite likely ahead of the October 2014 general elections. This will cause considerable disruption in the areas where protesters march and nearby localities.

The score for government effectiveness risk has remained unchanged due to conflicting movements in its subcategories. The score has been reassessed to take into account the good level of training at key bureaucratic institutions in middle and upper management. These include the Central Bank, the finance ministry and the national statistics agency. On the other hand, security forces responded in a heavy-handed manner to the street protests in June, and even used rubber bullets at times, injuring peaceful demonstrators. This response in part reflects how poorly prepared these forces are to deal with large demonstrations. Also, police interventions in favela shanty towns continue to raise concerns about human rights abuses.

The score for tax policy risk has deteriorated by six points, to 56. The score has been reassessed to give a greater weighting to the key issue of the tax system’s complexity. Brazil’s tax system is very intricate and, together with the heavy tax burden, presents considerable difficulties and costs for companies operating in the country.

The score for labour market risk has worsened by four points, to 50. Wage increases tend to be linked to the minimum wage, rises in which are indexed to inflation and real GDP growth, a formula which generally outstrips productivity growth. For instance, the minimum wage rose by 14% in 2012 and by 9% in 2013 in nominal terms.

The score for infrastructure risk has improved by four points, to 59. The score has been revised in line with the latest data showing increases in the penetration of mobile subscribers. However, the quality remains a source of concern, as evidenced by frequent dropped calls. The low speeds of mobile broadband is also a constraint on this indicator.

Overall, Brazil’s risk score has deteriorated by two points, to 46.

Central African Republic

In the latest review of our operational risk model for the Central African Republic (CAR) scores for two categories have deteriorated.

The score for government effectiveness risk has worsened by four points, to 93. The transitional government of the CAR faces a number of urgent priorities, including restoring security and order, and ensuring the basic functioning of the state administration. Although not explicitly anti-business, the government will have very little capacity to implement economic policies favourable to business in the short to medium term. Given these constraints and the minimal extent of the government’s control nationwide, policy will not be geared toward improving or facilitating the conduct of business.

The score for macroeconomic risk has worsened by 15 points, to 40. The insurgency by the Seleka coalition of rebels, which started in December 2012 and led to the ouster of President François Bozizé in March 2013, and the continued instability and insecurity that has been witnessed since then, will take a heavy toll on the economy. In addition to the widespread destruction and looting by Seleka fighters, the instability has disrupted economic activity across all sectors and derailed the little government structures in place. Most importantly, insecurity has restricted farmers’ access to inputs and markets, which will severely undermine the country’s major economic sector. As a result, real GDP is forecast to contract by 4.4% in 2013, before rebounding in 2014, provided that some form of stability returns. The political instability and insecurity has disrupted activity in the agricultural sector as well as transport, triggering acute food shortages in a number of isolated areas of the country. According to the UN World Food Programme, food prices had surged by up to 40% in the first few months of 2013. Given that food is the largest component of the consumer price index in the CAR, the Economist Intelligence Unit expects inflation to accelerate to an annual average of 8% in 2013.

Owing to these changes, the overall risk score for the CAR has worsened by two points, to 68.

Egypt [post-the removal of the president]

In the latest review of our operational risk model for Egypt, the scores for three categories have worsened, while another has improved.

The score for security risk has deteriorated by seven points, to 64. The risk of a domestic armed conflict has risen markedly since the ouster of Mohammed Morsi as president by the army on July 3rd. Violence on the streets between pro- and anti-Morsi demonstrators has seen dozens killed, with both sides claiming the other has been using guns. Meanwhile, the situation in the increasingly lawless Sinai Peninsula has deteriorated, prompting a large-scale offensive by the military. However, attacks on the security forces have continued, with militant extremists increasingly gaining access to weapons imported from Libya.

The score for government effectiveness risk has strengthened by three points, to 68. Despite the more unstable domestic political scene, a considerably more technocratic and experienced government has now been installed. The new prime minister, Hazem el-Beblawi, was the founding chairman of the Export Development Bank of Egypt in the mid-1980s, and went on to be the secretary-general of the UN Economic and Social Commission for West Asia, and the new finance minister is Ahmed Galal, who served for much of his career as an economist with the World Bank. As a result, a more liberal and pro-business government is set to remain in place for the time being.

The score for foreign trade and payments risk has deteriorated by seven points, to 46. Although the Central Bank of Egypt has been offered US$6bn in foreign exchange deposits from various oil-rich Gulf Arab allies, we anticipate that this will prove only a temporary palliative. Despite the recent strengthening of the Egyptian pound, in reality we now expect the country’s political crisis to stretch well into 2014, depressing the economy and causing downward pressure on the currency to build. This will force the central bank to further run down its foreign reserves, which are currently worth only around three months of imports, and lead it to place new restrictions on accessing foreign exchange.

The score for labour market risk has worsened by three points, to 57. The volatile security scene will weaken incentives for many expatriate Egyptians currently working abroad (around 1m Egyptians are estimated to work in the Gulf, for example), who it had been hoped would return to the country if the situation improved. Similarly, the risk of a “brain drain” of Egyptian professionals is now also higher, given the uncertain domestic scene. At the same time, foreign companies may also find it harder to attract foreign workers to the country given the worsening security situation.

Overall, Egypt’s risk score has deteriorated by two points, to 58.

Egypt [pre the removal of the president)

In the latest review of our operational risk model for Egypt, the scores for six categories have deteriorated, while strengthening for another.

The score for security risk has deteriorated by three points, to 57. Kidnapping remains a relatively unusual occurrence, but the increasingly lawless state of the Sinai Peninsula is a growing concern. In May seven Egyptian security personnel were kidnapped by militant Islamists (they were released a week later), and the growing weakness of the central government means that, if anything, its difficulties will increase, forcing it to rely ever more on tribes in the Sinai to enforce its authority (the security personnel were released after the intermediation of Bedouin tribes). Although tourism continues to recover and foreigners have not been targeted, this cannot be ruled out if the situation deteriorates once again.

The score for legal and regulatory risk has worsened by two points, to 50. Egypt has a relatively active Competition Authority, but there are fears that it could be used as a political arm of the executive. For example, there were concerns of a political motive in the case against Ezz Steel in 2012—the company’s founder was close to the ousted leader, Hosni Mubarak. As it was, Ezz Steel was cleared of abusing its dominant position in the market in any case. However, the hope for strengthening of the institution is now not expected given the forecast political turmoil envisaged in 2013-14.

The score for macroeconomic risk has worsened by five points, to 70. Inflation rose sharply in the first three months of 2013, but has since stabilised, at around 7.7%. The central bank has attributed the rise in inflation in the first part of the year to food and non-food price increases resulting from the depreciating exchange rate and bottlenecks in diesel distribution. Overall, the Economist Intelligence Unit expects average inflation in 2013 of 8.4%, rising to 9.9% in 2014 as the government finally begins to reduce fuel price subsidies.

The score for foreign trade and payments risk has deteriorated by three points, to 39. The World Bank puts average tariff rates in Egypt at 8%, and there is a risk that the average rate could rise as the government seeks to raise revenue. In late March, for example, the president, Mohammed Morsi, imposed a host of tariffs on “non-essential” items, including sunglasses, video games and caviar, of up to 40%, designed to raise up to E£1bn (US$140m) in budgetary revenue. Further such measures are possible, as the fiscal deficit continues to widen.

The score for tax policy risk has worsened by 12 points, to 56. Although the outlook for the tax regime is relatively unclear, the likelihood of higher taxes in the coming two years is rising. With the fiscal deficit rising and the economy stagnating, the government will need to find means other than just spending cuts to narrow the gap in its finances. This will, among other things, include the introduction of a property tax (after long delays) and the widening of the general sales tax. Both are also likely to be included as conditions within any IMF lending agreement. The risk of retroactive taxation is also rising along with the rising fiscal deficit. This has manifested itself with the news of a settlement with Egypt’s Orascom Construction Industries (OCI) of a claim from the tax authorities with respect to the sale of its building materials business to France’s Lafarge in 2007. OCI said that it will pay E£7.1bn in instalments (which will run up to the end of 2017) to settle the claim and accrued interest and fees, although it emphasised that this did not constitute acknowledgement of the validity of the claim. OCI argued that the business that was sold was listed on the Egyptian stockmarket, and that, in accordance with the regulations in force at the time, the sale was exempt from capital gains tax. However, OCI said that it had opted to settle rather than become embroiled in a lengthy and costly legal suit.

The score for labour market risk has deteriorated by four points, to 54. The Bank estimates that the level of enrolment in secondary education was 72.5% in 2010 (latest data available). The prospect of businesses benefiting from an influx of returning skilled expatriate Egyptians has dimmed, as the post-revolution political and security scene has deteriorated.

The score for infrastructure risk has strengthened by three points, to 47. We have adjusted this score as part of a regional benchmarking exercise. Although the internet and phone networks were disrupted during the unrest in early 2011 under the orders of the authorities, on the whole the telecommunications network is moderately developed.

Overall, Egypt’s risk score has deteriorated by two points, to 56.

Montenegro

In the latest review of our operational risk model for Montenegro, the scores for three categories have worsened.

The score for political stability risk has deteriorated by five points, to 55. The return to power of the prime minister, Milo Djukanovic, continues his and the Democratic Party of Socialists’ almost dynastic rule. The latter has been in power since the early 1990s, making Montenegro one of the few countries in the region not to have undergone regime change in more than two decades. There were also concerns about the outcome of the presidential election in April 2013, won by the incumbent, Filip Vujanovic, who had already served for two terms.

The score for macroeconomic risk has deteriorated by ten points, to 55. We have revised our real GDP growth forecast in 2013 upwards, to 2% (previously 1%), following year-on-year growth of 4.3% in the first quarter. However, we remain cautious about this growth rate being replicated in forthcoming quarters, given the difficult domestic situation in the wake of the bankruptcy of the KAP aluminium smelting factory in Podgorica in July, which accounts for about 40% of the country’s merchandise export receipts. We also expect output and exports to be constrained by negative growth of 0.8% in the euro zone. Domestic demand will remain depressed as a result of continued high unemployment, negative lending growth and relatively high levels of household indebtedness. In addition, public debt surged from around 37% of GDP in 2009 to 54% of GDP in 2012. The IMF has urged the authorities to undertake a major programme of fiscal consolidation; this includes the closure of the KAP factory, which is a huge drain on state finances.

The score for foreign trade and payments risk has worsened by three points, to 46. Montenegro retains significant non-tariff barriers to trade. In numerous surveys of importers, tariffs and non-tariff barriers are identified as the most problematic factors to doing business.

Overall, the risk score for Montenegro has deteriorated by two points, to 51.

Sri Lanka

In the latest review of our operational risk model for Sri Lanka, the scores for three categories have deteriorated, while another category has been upgraded.

The score for foreign trade and payments risk has deteriorated by four points, to 36. In recent months the government has renewed efforts to curb imports, to contain the current-account deficit and protect the currency. There is a growing risk that non-tariff barriers could be imposed to further these efforts.

The score for tax policy risk has worsened by 13 points, to 44. The score has been revised to reflect new guidance. According to the World Bank’s Doing Business Index in 2012, the number of payments required is high, at 61, while 254 hours are spent on tax processes.

The score for labour market risk has deteriorated by seven points, to 57. The score has been revised to reflect new guidance. According to the 2009 World Development Index the cost of firing was equivalent to 217 weeks of wages.

The score for infrastructure risk has improved by three points, to 50. The score has been revised to reflect new guidance, as well as the investments made in recent years, particularly the opening of the Hambantota port.

Overall, Sri Lanka’s risk score has deteriorated by two points, to 51.

Uruguay

In the latest review of our operational risk model for Uruguay, the score for one category has strengthened, while worsening for another, and two categories have been downgraded.

The score for legal and regulatory risk has deteriorated by three points, to 43. The score has been revised to reflect new guidance. According to the World Bank Doing Business Index, it took 725 days and 41 procedures to enforce a contract, which indicates that the legal system is more slow and inefficient than previously classified.

The score for macroeconomic risk has worsened by five points, to 55. Inflation has been above the target range for some time now, prompting the authorities to widen the range from 4-6% to 3-7%, and to shift from an inflation target to the targeting of the money supply in an attempt to tackle price pressures. A high level of wage indexation and the relatively weak credibility of the monetary authorities will prevent inflation from falling within the target range quickly, and the risks to our forecasts are on the upside.

The score for tax policy risk has deteriorated markedly by 12 points, to 50. The score has been revised to reflect new guidance, and is based on the number of payments and time spent on tax payment procedures (as measured by the World Bank’s Doing Business Index). However, fiscal pressures remain relatively contained, and there is unlikely to be a change of government in the near or medium term and the present government pursues orthodox fiscal policies. The government undertook a major fiscal reform less than five years ago and is unlikely to make significant changes in the near term. Although the marginal corporate tax rate is relatively low, at 25%, the total tax rate as a percentage of commercial profits is higher, at 42% in 2012 according to the World Development Indicators. This suggests the level of corporate taxation is moderate rather than low.

The score for infrastructure risk has strengthened by three points, to 41. Airport facilities are adequate in Uruguay. A major upgrade and expansion of the Carrasco international airport in Montevideo (the capital) means that airport infrastructure is modern and well-maintained and sufficient to meet demand. A problem, however, is the lack of a national carrier to provide easy access between Uruguay and its major markets in Latin America, Europe, Asia and the US, after the bankruptcy of the national airline, Pluna, in 2012.

Consequently, Uruguay’s overall risk score has deteriorated by two points, to 43.

Angola

In the latest review of our operational risk model for Angola, the score for one category has improved, while worsening for three others.

The score for government effectiveness risk has deteriorated by three points, to 89. Angola’s ranking in the ease of starting a business fell from 167 in 2012 to 171 in 2013, out of 185 economies around the world, according to the World Bank annual Doing Business report. It takes 68 days and eight procedures to start a business in Angola, compared to an average of 12 days and five procedures in OECD countries. Moreover, the cost is prohibitive for many—on average starting a business costs 105% of income per capita in Angola, compared with 13.3% of income per capita in OECD countries.

The score for macroeconomic risk has worsened by five points, to 35. We have changed our forecast for the path of the kwanza in 2013-17, which has increased the risk of higher inflation. Previously, we expected that the kwanza would appreciate slightly against the US dollar owing to the build up of foreign-exchange reserves. However, we now expect the currency to depreciate modestly against the dollar, owing to a decline in the current-account surplus amid signs that the US Federal Reserve will soon start to rein in its extraordinary monetary easing, which will strengthen the dollar. We forecast that the kwanza will depreciate from an average of Kz95.1:US$1 in 2012 to Kz98.1:US$1 in 2017. This will increase imported inflation, raising the possibility of higher inflation than previously expected.

The score for financial risk has strengthened by four points, to 54. Local financing will increase following recent changes in legislation that will support the expansion of the banking sector. Since the end of 2012 banks have had to hold a minimum of 80% of their capital in kwanzas, and oil companies will have to use local bank accounts to pay subcontractors in Angola. These new oil payment measures, which are being phased in over the 12 months to October 2013, will significantly boost liquidity in the banking system and increase banking opportunities, as well as the availability and depth of financing.

The score for tax policy risk has deteriorated by six points, to 44. According to local press reports in April 2013, the government plans to increase import tariffs to encourage the development of domestic industry. The tariff increase has not been officially confirmed and there are few details available of what goods the new rate will be applied to or when it will take effect. Angola ranks 154 out of 185 economies around the world in terms of the ease of paying taxes in the World Bank Doing Business Report 2013. The total effective tax rate is 53.2% of profit, compared with 42.7% in OECD countries, while on average 31 payments are required each year, compared with 12 in OECD countries.

Consequently, Angola’s overall risk score has deteriorated by a point, to 56.

Bosnia and Hercegovina

In the latest review of our operational risk model for Bosnia and Hercegovina, one category has been downgraded.

The score for political stability risk has deteriorated by five points, to 65. The score has been changed in view of the inability of the parliamentary majority in the Bosniak (Bosnian Muslim)-Bosnian Croat Federation to replace the ruling coalition with a new alliance of parties that reflects the realignment in parliament. The attempts to reshuffle the composition of the government have been resisted by the president of the Federation, Zivko Budimir, who is allied to the parties that are currently in government.

Overall, Bosnia and Hercegovina’s risk score has worsened by a point, to 53.

Cuba

In the latest review of our operational risk model for Cuba the score for three categories has deteriorated.

The score for government effectiveness risk has worsened by three points to 57. Cuba has traditionally scored very well relative to its regional peers on corruption among public officials. And the government has embarked on a drive over the past few years to stamp out corruption in the public sector. However, this has exposed significant levels of corruption among public officials, the result of failings within the economic system creating incentives. The government’s anti-corruption drive has seen some senior officials prosecuted, usually in the ministries offering the most opportunities for corrupt practices, such as mining, energy and telecommunications.

The score for foreign trade and payments risk has deteriorated by four points to 75. Instability in Venezuela, on which Cuba depends for the majority of its energy needs at hugely subsidised rates, raises the risk of a roll-back of support over the medium term. An end to the supply of subsidised oil would lead to a sharp rise in import costs (as Cuba would be forced to import oil at market rates), a sharp increase in fiscal spending and thus in turn a widening of the fiscal deficit.

The infrastructure risk score has worsened from 56 to 59. The quality of the road network, parts of which were already in need of repair, deteriorated after the withdrawal of Soviet support and the subsequent economic crisis. As of 2004, investment in the road system, as part of a general programme of infrastructure upgrades, has been under way. This has been supported by the development of the tourism sector which has supported upgrade to key infrastructure, including major roads. However, much needs to be done and large parts of the network remain in a poor condition.

As a result, the overall risk score for Cuba has worsened by one point to 54.

Guyana

In the latest review of our operational risk model for Guyana the score for three categories has deteriorated, while the score for another category has been upgraded.

First, the upgrade. The score for infrastructure risk has strengthened by four points to 59. The change in the score for information technology (IT) infrastructure reflects new guidance. The number of Internet users per 100 population was 32 in 2011, according to the World Bank’s World Development Indicators. IT infrastructure will sometimes be an impediment to business.

Now, the deteriorations. The score for security risk has worsened by four points to 50. According to the Global Peace Index, there were 20.7 homicides per 100,000 people in 2010. A deterioration of the security situation has been of concern for some time, but the government has so far been unable to address the problem, which is partly linked to Guyana’s location as a potential transit point for drugs shipments from cocaine-producing nations in South America to consumer markets in Europe.

The tax policy risk score has worsened from 31 to 38. Stability in the government has meant that tax policy has been relatively predictable and not subject to major change. However, a deterioration in the score is in line with new guidance and reflects the large number of payments required in taxes and also the large number of hours spent on tax processes, according to the World Bank Doing Business in index.

The labour market risk score has deteriorated by three points to 71. This is in line with new guidance on flexibility in hiring and firing, and firing costs. Firing a worker costs the equivalent of 56 weeks of wages in Guyana, according to the World Bank’s World Development Indicators, which is high by international comparison (restrictive labour laws strongly impede flexibility).

Consequently, the overall risk score for Guyana has worsened by one point to 50.

Haiti

In the latest review of our operational risk model for Haiti, one category has been upgraded, while the scores for three others have deteriorated.

The score for security risk has improved by four points, to 57. While kidnapping and extortion exist in Haiti they are not as prevalent as in other countries of the region owing to the lack of a domestic insurgent group (as in Colombia, for example) or very organized crime groups (as in Mexico). Kidnapping and extortion are more likely to be perpetrated by individual criminals or loosely organised street gangs.

The score for macroeconomic risk has deteriorated by ten points, to 40. Haiti’s local currency exchange rate has generally remained relatively stable owing to large inflows of foreign exchange from official lenders and international donors. Such inflows are expected to continue into the medium term, and this will limit exchange rate volatility going forward. Also, Haiti is not well integrated into the global economy, and this limits exchange-rate repercussions owing to external shocks. Lending rate volatility was quite high in 2008-12, and is expected to remain so over the 2013-14 period. This reflects in part the small size and highly concentrated nature of the local banking system. Because access to local credit is very limited, the impact of interest-rate volatility on economic activity is not widespread.

The score for foreign trade and payments risk has worsened by four points, to 43. The average weighted tariff rate in 2011 was a relatively high 7.3%, according to the World Bank. Besides tariffs, the authorities at times impose import restrictions or bans on agricultural products, particularly from the Dominican Republic, on sanitary grounds. This has often raised trade tensions with Haiti’s neighbor.

The score for labour market risk has improved by three points, to 68. There is relatively high flexibility in hiring and firing workers. The cost of firing amounts to around 17 weeks of wages, according to the World Bank, which is low by international standards. Extremely high unemployment and the low-skill nature of many jobs in the country help to explain this flexibility.

As a result, the overall risk score for Haiti has deteriorated by a point, to 64.

Mauritius

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

The score for labour market risk has worsened by three points, to 46. According to a recent study by the IMF, compensation to employees in the manufacturing sector more than doubled in 2000-12, while labour productivity increased by only about 60% over the same period. This has resulted in a considerable increase in unit labour costs, suggesting a loss in competitiveness of Mauritius-based companies. However, productivity in the service sector is harder to measure and the loss in overall competitiveness could be less than indicated by figures from the manufacturing sector. Nevertheless, the wide gap between wage increases and labour productivity gains in manufacturing means the score has worsened in this subcategory.

Consequently, Mauritius’ overall risk score has deteriorated by a point, to 29.

Mozambique

In the latest review of our operational risk model for Mozambique, the scores for two categories have deteriorated.

The score for security risk has deteriorated by seven points, to 36. In 2012 Mozambique celebrated the 20th anniversary of the Rome Peace Agreement, which ended the country’s protracted civil war. However, the main opposition party, Resistência Nacional de Moçambique (Renamo), has since then increasingly threatened a return to war. Outright conflict remains unlikely, but tensions flared up following deadly clashes in 2013. Occasional clashes between Renamo and Frente de Libertação de Moçambique will become more frequent in the run up to local elections in November 2013 and national elections in late 2014. Organised crime is another growing source of concern, where it has reportedly spread in diverse forms, including drugs trafficking, illegal timber trade, wildlife poaching and money laundering. The exact scope of organised crime is unknown, but there is a risk that thriving illegal and criminal businesses could undermine the legal economy, weaken state institutions and stain the country’s reputation internationally.

The score for foreign trade and payments risk has worsened by three points, to 39. This score has been revised as part of a regional benchmarking exercise. Mozambique introduced new regulations on foreign exchange in late 2011 aimed at reducing the dollar’s use. These rules have restricted investors’ ability to execute capital account transactions. Most transactions now require prior approval from Banco de Moçambique, the central bank.

Consequently, Mozambique’s overall risk score has deteriorated by a point, to 52.

Puerto Rico

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

The score for financial risk has deteriorated by four points, to 21. The bond market for Puerto Rican-based firms (as opposed to US firms operating from Puerto Rico) is small. Most of Puerto Rico’s bonds are government bonds or bonds from state-owned firms (mostly utilities) sold in the US municipal bond market, and generally pay a higher yield than US state bonds.

The score for tax policy risk has worsened by six points, to 44. A recent pensions law sets retroactive changes to the amount of payments received under the public-sector plans, as well as employee contributions. As a result, although retroactive taxes are unlikely, the pensions law sets a precedent that if need be, the government may resort to such measures.

Consequently, Puerto Rico’s overall risk score has worsened by a point, to 32.

The Gambia

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

The score for macroeconomic risk has worsened by ten points, to 40. Year-on-year inflation reached 5.7% in May, and the Economist Intelligence Unit has altered its forecast for 2013, from 4.4% previously to 5.5%, driven by the depreciation of the dalasi; an increase in public spending; a reduction in personal income tax, which will bolster consumer spending; and the introduction of value-added tax in January, which many companies opportunistically used to increase prices. The rate of average annual price growth is forecast to ease in 2014, to 4.2%, as global food prices continue to fall and oil prices edge up only slightly, although government spending and the agricultural sector’s vulnerability will generate upward inflationary risks. In addition, the domestic debt stock, which increased to an enormous 34% of GDP at end-2012, is a cause for concern and a large burden on the public finances. Government spending in the first quarter of 2013 exceeded targets and the implementation of the Programme for Accelerated Growth and Employment development plan launched in December 2011 and spanning 2012‑15 has further increased spending pressure. We expect interest payments on debt to continue to consume more than 20% of government revenue each year.

Overall, The Gambia’s risk score has deteriorated by a point, to 57.

Turkey

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

The political stability risk score has worsened by five points to 55. As a result of the violent clashes between the police and protesters during three weeks of mass anti-government demonstrations in June 2013 four people died and thousands were injured. Although the protests petered out after June 20th, the government has continued to pursue the groups behind the demonstrations, resulting in scores of protesters being detained by police. The protests have left Turkey more socially and politically polarised than before, giving rise to concern about the future stability of the government and even the possibility of a return to political violence not experienced in Turkey since the 1970s. In addition, during the mass protests the autocratic style of leadership of the prime minister, Recep Tayyip Erdogan came into sharp focus. His response to the protests was confrontational and dismissive of the issues raised by the demonstrators. After more than ten years in power, he completely dominates his party and the cabinet, and increasingly chooses to by-pass consultation and dialogue in the process of policymaking and legislation. Not even the senior members of his party or the cabinet appear willing to challenge Mr Erdogan, while the opposition is fragmented and largely ineffective. His position has been further reinforced by institutional reforms designed to reduce the role of the military in the political sphere, changes in personnel at the top of the Turkish Armed Forces and an overhaul of the judicial appointments process. These have all but eliminated the future risk of the military intervening to topple an elected civilian government or of the judiciary attempting to close the ruling party or any other major political force.

The score for macroeconomic risk stands unchanged at 50 owing to conflicting movements in its subcategories. The score for exchange rate volatility has worsened. The prospect of a gradual tapering of the US Federal Reserve Fund’s programme of bond buying from end-2013 triggered a shift in global investor perceptions, which because of Turkey’s still large current-account deficit triggered a sharp slide in the value of the Turkish currency in May-June 2013, pushing the Turkish lira:US dollar exchange rate to its weakest level on record of TL1.95:US$1 in early July. Given the uncertainty over the outlook for global financial flows and the likelihood that there will be fluctuations, further bouts of sharp exchange-rate volatility are expected. The score for price instability has also deteriorated. Having eased to about 6% towards the end of 2012, consumer price inflation picked up in the first quarter of 2013 and again in June when it spiked to 8.3% from 6.5% in May. The inflation spurt was larger than financial markets had anticipated, triggering a renewed sell-off of Turkish lira-denominated assets and a further depreciation of the currency. The slide in the value of the lira since early May is likely to keep upward pressure on inflation during the remainder of 2013. However, the score for crowding out has improved. Although the central government deficit rose in 2012, it remains low at 2.2% of GDP, as does the government debt/GDP ratio, which fell just below 40% of GDP. We expect the government’s sound management of the public finances to continue, despite there being a series of elections in 2014 and 2015. The government’s relatively low borrowing requirement and historically low interest rates should help to increase the availability of credit to businesses and households. Having slowed in 2012 as a result of monetary policy tightening by the Central Bank of Turkey, credit growth picked up towards the end of the year and has been hovering just above the authorities’ 15% credit growth target.

As a result, the overall risk score for Turkey has worsened by one point to 48.

NO NET CHANGE

Bahrain

In the latest review of our operational risk model for Bahrain two categories have been upgraded while scores for two categories have deteriorated.

The score for macroeconomic risk has strengthened by five points, to 20. Although public debt continues to rise, the Economist Intelligence Unit has revised the score for crowding out in light of a wider regional benchmarking exercise. Equally, despite recent global economic volatility (sparked in large part by fears of an ending of quantitative easing in the US), we assess that Bahrain will retain access to the international debt markets, with a US$500m sovereign debt issue planned to take place shortly.

The score for infrastructure risk has improved by three points, to 38. The quality of the country’s telecommunications network has enhanced markedly in recent years, with some 128 mobile phones per 100 people, according to the World Bank. With fourth-generation services fully available for mobile users, we now assess that there is only a low risk of business finding the telephone network inadequate.

The score for foreign trade and payments risk has worsened by four points, to 25. We have revised higher our assessment of tariff rates in line with the most updated Bank data, which show the weighting average tariff rate in the kingdom at 5.7%—above our previous figure.

The score for financial risk has deteriorated by five points, to 38. The bankruptcy of a Bahrain-based Islamic investment house, Arcapita Bank, has raised concerns both about the quality of regulation in the kingdom and the health of the Islamic banking sector. The Central Bank of Bahrain (CBB) is owed US$255m by the bank, but is only likely to recover a fraction of the amount. The central bank’s intervention had not been known, until Arcapita’s bankruptcy proceedings. The CBB’s prestige has been eroded by a perception that it has failed to supervise Islamic investment banks adequately. In recent years five Bahrain-based Islamic banks have collapsed.

Despite these changes, the overall risk score for Bahrain stands unchanged at 39.

Burundi

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

The foreign trade and payments risk score has strengthened by four points to 46. The risk of a financial crisis has dropped slightly. Burundi’s current-account balance is set to remain structurally in deficit, heightening the economy’s vulnerability to external shocks, while large budget deficits will continue to undermine the sovereign position. However, external debt levels remain under control and donors have pledged to continue supporting the state budget in 2013-14 (donor transfers are a major source of foreign currency). In addition, the banking sector appears to have strengthened of late, not least owing to the entrance of solid regional banks.

However, the overall risk score for Burundi stands unchanged at 65.

Cape Verde

In the latest review of our operational risk model for Cape Verde, the score for one category has improved, and worsened for another.

The score for macroeconomic risk has deteriorated by five points, to 20. The Economist Intelligence Unit has revised down its economic growth forecast in Cape Verde to 3% (previously 4.3%) in 2013 and to 3.2% (previously 4.5%) in 2014 in line with an expected drop in investment and ongoing economic troubles in Europe, Cape Verde’s major trade, aid and investment partner. Provisional GDP estimates using a more up-to-date national accounts system and 2007 as a base year (previously 1980) suggest that GDP growth could be even slower in 2013-14, further justifying our score change.

The score for financial risk has strengthened by five points, to 33. Cape Verde’s financial sector has expanded relatively rapidly in recent years, underpinned by robust economic growth rates, rising income levels, high inflows of foreign direct investment and remittances. As a proportion of GDP, credit to the private sector has expanded steadily, from about 35% of GDP a decade ago, to close to 60% of GDP in 2012. While the overall quality of loans has slightly decreased and slower economic growth in 2013-14 is likely to result in much slower progress toward financial deepening, the availability of finance in the local market is relatively good, justifying an improvement to the score.

Overall, Cape Verde’s risk score has remained unchanged, at 37.

Chad

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

The score for financial risk has strengthened by four points, to 67. Despite growing opposition to the peg of the CFA franc to the euro within CFA countries, the currency arrangement is likely to remain intact throughout the forecast period, as the risks posed by a one-off devaluation outweigh the potential benefits to the region’s exporters. In addition, the peg to the euro enables CFA countries to maintain price stability. The risk of a devaluation (or of significant volatility as a result of lagging economic troubles in the euro zone) cannot entirely be discounted, however, but the Economist Intelligence Unit assesses that it is low.

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

East Timor

In the latest review of our operational risk model for Timor-Leste a category has been upgraded while the score for another has deteriorated.

The score for government effectiveness risk has strengthened by three points, to 79. The Economist Intelligence Unit has adjusted the score in this category owing to the country’s better performance in several corruption indexes and due to the work of Timor-Leste’s Anti-Corruption Commission. The gradual maturing of the country’s democracy and voters exercising their rights to remove corrupt politicians from power at the ballot box also means that the new score is more appropriate.

The score for macroeconomic risk has worsened by five points, to 20. We have increased the score owing to a change in our forecasts for inflation in 2013-14. Although consumer price inflation is generally on a long-term downward trend, and lower global commodity prices and the withdrawal of UN troops will all help to keep inflationary pressure contained, we still believe that inflation will average more than 7% year on year throughout the next two years.

Owing to these balancing changes, the overall risk score for Timor-Leste stands unchanged at 52.

Iceland

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

The score for financial risk has strengthened by four points, to 50. The three main banks were restructured in 2009 and their balance sheets have been reduced. The domestic arms of Glitnir and Kaupthing (renamed Islandsbanki and Arion, respectively) are now mainly owned by foreign creditors; Landsbanki is still mostly state-owned. The banks are repaying their debts gradually. Although the banking sector is still shaky, improvements in the economic outlook mean that the gradual restructuring of the sector will continue to put the banks on a more sustainable footing.

Overall, Iceland’s risk score has remained unchanged, at 28.

India

In the latest review of our operational risk model for India, the scores for two categories have improved, while deteriorating for another.

The score for macroeconomic risk has deteriorated by ten points, to 40. The exchange rate has been very volatile in recent months and slid to historical lows several times. Given the current weakness in macroeconomic fundamentals, the exchange rate is likely to remain volatile. The weakness in the exchange rate will lead to the emergence of inflationary pressures as India imports crude oil. We expect inflation to remain elevated in 2013

The exchange rate has been very volatile in recent months and slid to historical lows several times. Given the current weakness in macroeconomic fundamentals, the exchange rate is likely to remain volatile.

The score for foreign trade and payments risk has strengthened by four points, to 50. The average tariff rate was 8.2% in 2009 and tariffs have not been increased as India seeks to liberalise its economy. It has also been compelled to lower tariffs in line with various free-trade agreements.

The score for financial risk has improved by four points, to 38. The performance of three World Bank indicators in 2012—market capitalisation, value of trade and the turnover ratio—leads us to now assess that the liquidity of the stockmarket is average, compared with low previously.

Overall, India’s risk score has remained unchanged, at 52.

Indonesia

In the latest review of our operational risk model for Indonesia, the score for one category has improved, while deteriorating for two others.

The score for government effectiveness risk has deteriorated by four points, to 79. The government has adopted an increasingly nationalistic tone to economy policymaking in the past year. Regulations in the mining sector are being toughened to limit foreign shareholdings, and several companies have encountered difficulties with the licences that they believed they had been granted. Comments by the trade minister are becoming more and more bullish and further new pieces of legislation that make operating in Indonesia more difficult for foreign businesses are likely in 2013-14.

The score for legal and regulatory risk has improved by three points, to 70. According to the latest World Bank Ease of Doing Business index, Indonesia scores relatively well for the time that is required to enforce a contract. However, its score is dragged down by the number of procedures that are required for this process. Nevertheless, we have adjusted our score to better reflect the country’s gradual progress in this area.

The score for macroeconomic risk has worsened by five points, to 35. We have adjusted our score downwards to reflect our new forecast that consumer price inflation will accelerate to around 7% in 2013-14. However, the trigger for this rise is the government’s increase in the prices for petrol and diesel, which were extremely heavily subsidised. We consider this policy to be long overdue, and that the inflationary effects will ease by the second half of 2014.

Overall, Indonesia’s risk score has remained unchanged, at 55.

Israel

In the latest review of our operational risk model for Israel, the score for one category has strengthened.

The score for macroeconomic risk has improved by five points, to 35. Given that global policy rates remain low and are unlikely to shift upward markedly until 2015, and with domestic inflation low, policy rates are unlikely to rise sharply especially given concerns about currency appreciation. The domestic financial scene is fairly stable and market lending rates (and spreads) are unlikely to diverge sharply in the next two years.

However, Israel’s overall risk score has remained unchanged, at 31.

Liberia

In the latest review of our operational risk model for Liberia, the score for one category has deteriorated, while strengthening for another.

The score for government effectiveness risk has deteriorated by three points, to 82. The publication in mid-May of the findings of an audit commissioned by the country’s Extractive Industries Transparency Initiative has led to a renewed focus on the failings of the government in managing the country’s natural resources. The audit, conducted by Moore Stephens (a consultancy firm) found that of the 68 contracts examined, covering deals worth nearly US$8bn and signed in over the 2009-11 period, only six were fully compliant with Liberia’s concession laws. Among the issues highlighted by the audit were the lack of competitive bidding on a number of contracts, including agricultural concessions awarded to the Cavalla Rubber Corporation (France) and two palm oil companies, Sime Darby (Malaysia) and Golden Veroleum (Singapore).

The score for macroeconomic risk has improved by five points, to 20. The Liberian dollar has largely held its ground in 2013 so far despite high import levels, together with low export earnings and limited foreign-exchange reserves, which put downward pressure on the currency. The Economist Intelligence Unit therefore forecasts that the Liberian dollar will average L$74:US$1 in 2013 and depreciate modestly to L$76:US$1 in 2014. The IMF classes the L$:US$ exchange rate as “other managed”, meaning that the authorities intervene to influence its direction. However, because of the high level of dollarisation, it is not really used as a policy tool to improve competitiveness.

Overall, Liberia’s risk score has remained unchanged, at 56.

Venezuela

In the latest review of our operational risk model for Venezuela, the score for one category has improved, while worsening for another.

The score for political stability risk has remained unchanged, at 65, owing to conflicting movements in its subcategories. There is a greater likelihood of the incumbent government led by President Nicolás Maduro losing power within the forecast period, compared with under the previous president, Hugo Chavez. Although the opposition would be more welcoming to foreign investors, the ensuing period of economic adjustment (assuming that price and exchange controls are eased) would make operating conditions more difficult for businesses, at least in the short term. On the other hand, when he was alive, Hugo Chavez had the authority to act without constraint as nobody questioned his decisions. His successor, Mr Maduro, lacks this authority and is bound by a greater extent by surrounding institutions. However, that said, legally there are very limited constraints on the executive office.

The score for macroeconomic risk has deteriorated by five points, to 85. The Economist Intelligence Unit has downgraded its GDP forecasts and we now expect a full-year average contraction of 0.5% in 2013 (previously we expected marginal, positive growth). We continue to expect weak growth of just over 2% in 2014. Currently, we do not anticipate two consecutive quarters of negative real growth in either year but there is clear downside risk, as deep price and currency distortions are strangling domestic economic activity.

The score for foreign trade and payments risk has improved by four points, to 75. Mr Maduro is highly aware that domestic shortages of many consumer and food items are placing his presidency in jeopardy. As a result, he is reliant on imports to meet basic consumer needs. He is unlikely to aggravate other governments sufficiently to risk having an embargo put in place, because of the domestic economic problems that would ensue.

Overall, Venezuela’s risk score has deteriorated by a point, to 77.

Yemen

In the latest review of our operational risk model for Yemen, the scores for two categories have improved, while worsening for another.

The score for security risk has strengthened by four points, to 89. Since the crisis of 2011 when Yemen appeared to be on the brink of civil war, stability has improved. Violent crime, especially in the southern city of Aden, has eased somewhat, although the atmosphere remains febrile and uncertain.

The score for tax policy risk has deteriorated by six points, to 44. Corporation tax rates in Yemen have on average been below their official rate of 15-20% (excluding hydrocarbons) because collection rates have been extremely poor and book-keeping equally so. However, despite the country’s political ructions, collection rates have improved markedly of late, placing a growing tax burden on many businesses. As a result, the Economist Intelligence Unit has adjusted the country’s corporation tax score.

The score for infrastructure risk has improved by four points, to 84. We have adjusted this score as part of a wider global benchmarking exercise. Both telephone mainline and mobile phone subscription rates have picked up markedly in recent years. Although the country still has among the lowest rates of mobile phone subscribers per 100 people in the Middle East region, the ratio rose from 35.6 in 2009 to 54.4 in 2012 according to the International Telecommunication Union.

Overall, Yemen’s risk score has remained unchanged, at 71.