World risk: Economic/Political Operational risk ratings review

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RATINGS CHANGES

There were changes to risk scores in 18 countries during the latest monthly updating cycle of the Risk Briefing model. These led to upgrades of the overall score in only nine cases, but there were four downgrades. In the remaining five 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
Portugal B 30 B 32
Uzbekistan D 73 D 74
Montenegro C 50 C 51
Luxembourg A 16 A 17
Kenya D 61 D 62
Indonesia C 54 C 55
East Timor C 51 C 52
Democratic Republic of the Congo D 74 D 75
Colombia C 44 C 45
DOWNGRADES
Armenia C 52 C 51
Moldova C 55 C 54
Niger D 63 D 62
Thailand C 49 C 48
NO NET CHANGE
Burkina Faso C 52 C 52
Central African Republic D 72 D 72
Guinea D 80 D 80
Mauritania D 62 D 62
Qatar B 27 B 27

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UPGRADES

Portugal

In the latest review of our operational risk model for Portugal, the scores for five categories have improved and deteriorated for one other.

The score for security risk has improved by three points, to 11. While opposition to austerity measures remains heightened, demonstrations have shown fewer signs of violent disruption since 2012.

The score for government effectiveness risk has worsened by four points, to 36. Progress on reducing the level of red tape in order to spur economic activity has been patchier than we expected.

The score for macroeconomic risk has strengthened by ten points, to 50. Following contractions in 2011 and 2012, we expect a return to modest real GDP growth in 2014, strengthening slightly in 2015. There are downside risks to this forecast, including in relation to Portugal’s planned bailout exit in May 2014 and to euro zone policymakers’ efforts to prevent a reintensification of the crisis in the bloc. In addition, although the risk of volatility in the financial markets remains considerable, it has eased since the height of the euro zone crisis.

The score for foreign trade and payments risk has improved by three points, to 18. Portugal still faces significant challenges given that its EU/IMF bailout is set to end during 2014. However, for the time being the euro zone crisis has eased. This has reduced the likelihood of a crisis emerging in Portugal that would be significant enough to curtail access to foreign exchange.

The score for financial risk has improved by four points, to 29. Although reservations remain about the final scope and structure of new regulatory arrangements that are being put in place across the euro zone’s banking sector, sufficient progress has been made during 2013 to reduce the risk of a systemic crisis being allowed to develop.

The score for labour market risk has strengthened by four points, to 39. Opposition to austerity is such that the risk of labour strikes remains elevated. Nevertheless, it has eased somewhat in line with a gradual reduction of the risk that the euro zone will plunge back into major crisis.

Overall, Portugal’s risk score has improved by two points, to 30.

Uzbekistan

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

The score for legal and regulatory risk has improved by three points, to 95. According to the World Bank’s 2013 Ease of Doing Business index, it takes 195 days to enforce a contract. This is low by international standards. The Bank also reports that 41 procedures are required to enforce a contract, which is high but still implies an improvement of the score for the speed and efficiency of the judicial process. However, the improvement is modest as we are sceptical that the Bank’s indexes capture the extent of informal barriers to the effective and rapid enforcement of contracts.

The score for macroeconomic risk has worsened by five points, to 60. We have raised our consumer price inflation forecast for 2014 to 11.4% and estimate that inflation in 2013 stood at 11.6%. According to the government, inflation in 2013 averaged 7%. However, we do not believe that the official figure captures the true extent of price growth as they do not appear to correlate with the rate of monetary expansion and growth in nominal private consumption. The IMF also estimates that inflation averaged around 11% in 2013.

The score for foreign trade and payments risk has strengthened by four points, to 82. Uzbekistan’s government releases only limited data, of doubtful integrity, making it difficult to accurately assess the country’s economic position. World Bank data suggest that the total debt is low, at 17% of GDP, indicating that the fiscal position is reasonably secure. However, the government has in the past been known to limit companies’ access to foreign currency at the official exchange rate. It is not clear whether this is due to low liquidity/solvency or because the government wishes to prevent the repatriation of profits.

The score for infrastructure risk has improved by nine points, to 75. Uzbekistan has made good progress in upgrading its rail network, for which the infrastructure programme has allocated funds of US$1.6bn over five years. Uzbekiston Temir Yullari (UTY), the national rail company, which carried 17.2m passengers last year, is upgrading domestic routes and pursuing international projects in an effort to position Uzbekistan as an international transit hub. A high-speed link using Spanish-built Talgo trains between Tashkent and Samarqand was launched in 2011, cutting the journey time on the 344-km route from 3.5 hours to two (around half the time of the 320-km road trip). This year UTY plans to upgrade tracks up to 240 km. Electrification of the Tashkent-Samarkand line was completed in 2012, and a US$176m project to electrify a 140-km stretch between the Samarkand region and the Kashkadarya region is scheduled for completion in 2016.

Consequently, Uzbekistan’s overall risk score has improved by one point, to 73.

Montenegro

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

The score for macroeconomic risk has strengthened by five points, to 50. We are forecasting a moderate pick-up in real GDP growth this year, to 3%, from an estimated 2% in 2013. However, there are several downside risks to this forecast, not least the difficult fiscal situation, growing public debt and payment problems arising from the collapse of the aluminium plant company, KAP. The government will probably have to implement new fiscal measures, including new taxes, to try to put the state finances on a more sustainable footing. Unemployment remains high at more than 15% and is likely to increase as a result of KAP’s bankruptcy. On the positive side, euro zone growth is forecast to pick up in 2014, which may boost trade with Montenegro’s main trade partners, and the tourism sector should also benefit as a result.

Consequently, Montenegro’s risk score has improved by one point, to 50.

Luxembourg

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

The score for macroeconomic risk has improved by ten points, to 25. The latest national accounts figures show that the pick-up in economic activity recorded in the second quarter of 2013 was sustained in the third quarter, suggesting that the economy is on track to achieve the officially projected real GDP growth rate of 2% for the year as a whole. However, Luxembourg’s economy is heavily dependent on the financial services sector, which faces tighter regulation and international pressure to reduce advantages as a tax haven for private banking. Growth of 2% a year is disappointing by the country’s standards, given that the economy had grown by an annual average of around 5% in the three decades to 2008.

Consequently, Luxembourg’s overall risk score has improved by one point, to 16.

Kenya

In the latest review of our operational risk model for Kenya, one category has been upgraded and the scores for three others have improved.

The score for government effectiveness risk has improved by seven points, to 79. Kenya is ranked 136th out of 177 states in Transparency International’s 2013 Corruption Perceptions Index, an improvement from its 139th placing in 2012. However corruption, ranging from minor bribes to major scandals, will remain a serious problem throughout the public sector. Meanwhile, although human rights groups allege that Kenya’s Anti-Terrorism Police Unit is guilty of abuses against those suspected of links to terror groups, it is not clear that such abuse is systemic. As a result, we have slightly revised down our assessment that Kenya will be accused of serious human rights abuses.

The score for legal and regulatory risk has improved by two points, to 73. The most recent World Bank Doing Business report suggests that there have been improvements in the ease of paying taxes and trading across borders. However, serious constraints remain, notably in terms of resolving insolvency.

The score for macroeconomic risk has improved by five points, to 35. The shilling remains vulnerable to global monetary uncertainty, which is putting downward pressure on many emerging-market currencies. However, IMF support, robust investor interest in Kenyan stocks and bonds, and healthy foreign-exchange reserves will offer some protection, and thus reduce exchange rate volatility.

The score for foreign trade and payments risk has improved by four points, to 50. Kenya’s average tariff rate is some 6.1%, according to the World Bank, which is slightly below our previous assessment. However, discriminatory tariffs remain a significant problem.

The score for infrastructure risk has remained unchanged owing to conflicting trends in its subcategories. Kenya’s fixed-line network remains relatively underused, with fewer than six lines per 1,000 people in 2012 (according to the most recent data available). However, the mobile telecoms sector is thriving, as evidenced by the fact that the MPesa mobile-payments system originated in Kenya. On the other hand, the existing rail network is inadequate. Nonetheless, work has started on a standard-gauge railway from Mombasa to Nairobi, which could transform the logistics environment and bring down freight costs. It is due for completion around 2017-18.

Consequently, Kenya’s risk score has improved by one point, to 61.

Indonesia

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

The score for security risk has improved by three points, to 54. We assess that acts of terrorism in Indonesia will no longer occur with a frequency strong enough to substantially disrupt businesses, owing to a decline in both the number and severity of terrorist attacks in the past two years. Although plots will still be hatched, and some attacks in the forecast period are almost certain, the capability of the security forces to intercept planned terrorist activities has risen markedly. Recent planned incidents have also been smaller in scale and less sophisticated in their attempted execution, which means that they have posed less of a risk to business operations.

The score for government effectiveness risk has improved by four points, to 75. We have lowered the risk that Indonesia could be accused of serious human rights abuses in the forecast period. The main flashpoint remains the restive and uncertain situation in the eastern area of Papua, where a long-running campaign for greater self-government has been conducted against the central authorities. It is possible that further unrest could be put down with force by the security apparatus, but we are not at present forecasting a serious escalation in separatist activity.

The score for financial risk has improved by four points, to 46. We have reduced our perception of the risk of a major devaluation of the rupiah. This is not because we are any more confident about the currency’s prospects, but because it lost around 20% of its value against the US dollar in 2013, and is thus less likely to fall as far in 2014-15. We still believe that the rupiah will weaken as US monetary policy is gradually tightened, but we do not believe it to be as overvalued as it was a year ago.

The score for labour market risk has improved by three points, to 61. There is no longer a very high risk of firms encountering difficulties in finding specialist labour. Based on the latest World Development Indicator scores for participation in tertiary education, we believe that an improved score is more appropriate, given the rise in the number of future graduates and the country’s favourable demography.

Consequently, Indonesia’s overall risk score has improved by one point, to 54.

East Timor

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

The score for macroeconomic risk has improved by five points, to 15. The Economist Intelligence Unit believes that interest rate volatility will continue to decline in the next two years as the Central Bank of Timor-Leste takes greater control over monetary policy, which will trickle down into market lending rate behaviour. The expanding size of the banking sector, growing demand for credit and a calmer global environment in the coming years will permit a more stable period of monetary policy.

Consequently, Timor-Leste’s risk score has improved by one point, to 51.

Democratic Republic of the Congo

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

The score for macroeconomic risk has improved by five points, to 40. The high level of dollarisation in the Congolese economy has continued to limit the volatility of the exchange rate. Downwards pressure on the currency in 2014-15 stemming from the wide current-account deficit and relatively low interest rates will be offset by robust investment inflows, mainly into the mining and construction sectors. We expect the average exchange rate to weaken slightly from an estimated FC918:US$1 in 2013 to FC925:US$1 in 2015 in line with developments on the current account.

Overall, Democratic Republic of the Congo’s risk score has improved by one point, to 74.

Colombia

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

The score for legal and regulatory risk has improved by two points, to 48. Accounting practices continue to improve across formal business, as reflected by the World Bank’s Enterprise Survey of 2013, which assigned Colombia a score of 9 out of 10 (10 being the best score) in the extent of business disclosure. Efforts have been made to reduce unconventional auditing methods and to limit the influence of money-laundering.

The score for financial risk has improved by four points, to 42. After a period of rapidly rising credit growth in 2010-11, Colombia’s authorities have managed to slow down lending growth to more moderate levels, to around 15% year on year in 2012-13. This is particularly the case for consumer lending, with growth in the segment slowing considerably. There have also been further regulatory improvements after the collapse of the country’s biggest stock-broker in end-2012.

The score for infrastructure risk has improved by three points, to 53. The density of mobile phone coverage has increased exponentially over the past decade, and Colombia is rapidly approaching saturation levels, with mobile phone subscriptions reaching almost 100 subscriptions per 100 people in 2013. Landlines have not increased at the same rate, but now almost all Colombians, with the exception of the most remote areas, can access a telephone network. Companies have also pledged to invest large amounts to improve services.

Consequently, Colombia’s overall risk score has improved by one point, to 44.

DOWNGRADES

Armenia

In the latest review of our operational risk model for Armenia, one category has been downgraded, while the scores for two categories have improved.

The score for macroeconomic risk has worsened by ten points, to 30. Armenia has a persistent current-account deficit, forecast to average 7.2% of GDP in 2014-15. Given this, the reduction in asset purchases by the US Central Bank, the Federal Reserve, which is likely to lead to a strengthening of the dollar, could put the Armenian dram under pressure. This may push the Central Bank of Armenia to push up interest rates rapidly in order to defend the currency.

The score for labour market risk has improved by three points, to 43. According to World Bank data, dismissals cost firms the equivalent of 13 weeks of wages per employee. This is very low by international comparisons. But there is a risk that firms, particularly large employers, may encounter informal administrative pressure to retain staff, particularly during an economic downturn.

The score for infrastructure risk has improved by three points, to 66. Negative factors in the Armenian power sector include the high cost of electricity, the high level of dependence on a single supplier, Russia, for gas supplies, and ageing infrastructure. In particular, Armenia’s nuclear power station, which supplies around 40% of Armenia’s electricity, will soon have to be re-fitted or decommissioned, raising the risk of power shortages. Despite this, the number of power shortages is currently low in international comparison, averaging one a month.

Consequently, Armenia’s risk score has worsened by one point, to 52.

Moldova

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

The score for macroeconomic risk has worsened by five points, to 40. Our forecast for inflation is 5.4% in 2014 and 6% in 2015. We expect another nominal leu depreciation against the US dollar in 2014. This is likely to boost inflation in Moldova in the near term, and we expect stronger oil prices and foreign-exchange inflows to further lift price growth in 2015.

The score for foreign trade and payments risk has deteriorated by four points, to 43. In September 2013 Russia imposed a ban on Moldovan wine imports (as it did in 2006). The ban was a part of Russia’s wide-ranging efforts to prevent a number of former Soviet states (including Georgia, Armenia and Ukraine) from progressing on EU integration, which would loosen Russia’s influence and scotch its plans for creating a Eurasia Union across the former Soviet space as a trade bloc to rival the EU.

Consequently, Moldova’s overall risk score has worsened by one point, to 55.

Niger

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

The score for foreign trade and payments risk has worsened by three points, to 46. Despite stated efforts to lower tariffs by the Nigerien authorities, the average weighted tariff rate has increased in recent years, suggesting continued resistance to implementing regional schemes to liberalise trade.

Consequently, Niger’s risk score has worsened by one point, to 63.

Thailand

In the latest review of our operational risk model for Thailand, two categories have been downgraded.

The score for security risk has worsened by four points, to 61. The risk of violent civil unrest has risen following two months of intensive street protests in the capital, Bangkok, aimed at toppling the government led by the prime minister, Yingluck Shinawatra. Despite an election called for in early February, we do not expect the poll, regardless of its results, to lead to a cessation in demonstrations, given that the opposition appears to have turned its back on the ballot box as a method of solving the crisis.

The score for political stability risk has worsened by five points, to 65. Although polls have been called for early February, we do not expect social unrest to quell. Much depends on the stance of the army, which has the ability to remove the ruling government if it is persuaded of the protesters’ case. Given that the main opposition has said that it will not participate in the election, it seems that the poll will offer only another opportunity for the protests on the street to escalate.

Consequently, Thailand’s overall risk score has worsened by one point, to 49.

NO NET CHANGE

Burkina Faso

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

The score for foreign trade and payments risk has worsened by three points, to 32. The weighted average tariff rate in Burkina Faso has remained high. In recent years, it has increased slightly despite a stated commitment by the authorities to lower tariffs and boost trade, particularly within the region.

Overall, however, Burkina Faso’s risk score has remained unchanged, at 52.

Central African Republic

In the latest review of our operational risk model for Central African Republic, the score for one category has worsened.

The score for security risk has deteriorated by seven points, to 89. The security situation has continued to deteriorate since the dissolution in September of Seleka, the coalition of rebel forces that brought the president, Michel Djotodia, to power in March this year. Large swathes of the country are now controlled by armed rebel (or criminal) gangs and the country is characterised by a total breakdown of law and order, with ongoing looting and destruction of private property. Violence has also taken an inter-ethnic tone, with clashes between Christian and Muslim communities. UN and humanitarian material have also been targeted. The weak and ineffective state administration has all but collapsed since the coup, in turn leading to a surge in organised criminal activity. There have been widespread reports that illegal trade in ivory has become a source of funding for armed groups, as has illegal trade in diamonds, which is likely to have expanded following the CAR’s suspension from the Kimberley Process, an international diamond certification scheme.

Overall, however, Central African Republic’s risk score has remained unchanged, at 72.

Guinea

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

The score for security risk has deteriorated by three points, to 64. Reported incidences of violent criminals targeting people travelling in high-value cars in Conakry (the capital) and in bush taxis in the countryside have risen in recent months. The spike in violent crime has been noted by the UN Security Council, which on December 17th 2013 expressed concern at rising lawlessness within the Mano River Union (comprising Guinea, Liberia, Côte d’Ivoire and Sierra Leone).

The score for foreign trade and payments risk has improved by seven points, to 82. Despite persistent misgivings about governance, the risk of a trade embargo has receded with the belated holding of legislative elections in September 2013, ushering in a new era of renewed international donor engagement.

Overall, however, Guinea’s risk score has remained unchanged, at 80.

Mauritania

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

The score for macroeconomic risk has worsened by five points, to 30. There are strong downside recession risks from the danger of renewed problems in the global economy and threats to the stability of the euro zone. A period of sustained political instability or a large drop in international commodity prices, due to a contraction in global demand, would mean Mauritania’s current growth forecast will weaken considerably.

Overall, however, Mauritania’s risk score has remained unchanged, at 62.

Qatar

In the latest review of our operational risk model for Qatar, the score for one category has strengthened, while deteriorating for another.

The score for macroeconomic risk has deteriorated by five points, to 15. We have revised higher our inflation forecast, with consumer price growth at 4.2% and 4.6% in 2014 and 2015, respectively, largely due to a mismatch in supply and demand in the housing market and rapid growth in consumer demand.

The score for financial risk has improved by four points, to 29. The loan/deposit ratio was high at 102.4% at the end of the third quarter of 2013, after having fallen from 107% in January. The pace of credit growth is likely to have increased in the fourth quarter as work on some US$30bn worth of 2022 football World Cup-related projects has started.

Overall, Qatar’s risk score has remained unchanged, at 27.

Source: Risk Briefing