Global Financial Operational risk ratings

RATINGS CHANGES

There were changes to risk scores in 34 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 seven downgrades. In the remaining 18 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
Vietnam C 50 C 52
Latvia B 28 B 30
Indonesia C 50 C 52
Philippines C 49 C 50
Laos C 59 C 60
Ireland B 26 B 27
Ethiopia C 60 D 61
Brunei B 31 B 32
Azerbaijan C 50 C 51
DOWNGRADES
Sierra Leone C 60 C 57
Spain B 28 B 26
Afghanistan D 75 D 74
Belarus D 69 D 68
India C 52 C 51
Niger D 64 D 63
Slovenia B 27 B 26
NO NET CHANGE
China C 43 C 43
Estonia B 26 B 26
France B 24 B 24
Hong Kong A 13 A 13
Iraq D 74 D 74
Italy B 37 B 37
Mali C 55 C 55
New Zealand A 15 A 15
Oman B 35 B 35
Papua New Guinea C 53 C 53
Romania B 37 B 37
Serbia C 48 C 48
Singapore A 12 A 12
Sudan D 78 D 78
Tajikistan D 71 D 71
Togo C 59 C 59
Turkey C 47 C 47
Yemen D 73 D 73

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UPGRADES

Vietnam

In the latest review of our operational risk model for Vietnam, the score for three categories has improved.

The score for macroeconomic risk has strengthened by 15 points, to 25 owing to favourable changes in two underlying categories. The outlook for inflation has improved markedly on the back of the plunge in global oil prices. Consequently, we have lowered our short-to-long run projections for average consumer price inflation. Meanwhile the proportion of public debt to the amount of money circulating in the economy is forecast to edge down in 2015-16, thus lowering the risk of crowding out.

The score for foreign trade and payments risk has improved by four points, to 46. The level of non-performing loans to total loans in the banking sector has declined slightly. In addition, the government’s first international bond auction since 2010 in November 2014 was a success, underscoring an improvement in the outlook for Vietnam’s exchange rate and fiscal balance.

The score for infrastructure risk has strengthened by three points, to 56. Internet penetration has improved: the number of internet users for every 100 people has increased to 44, as has the number of broadband subscribers. The number of internet servers per capita has risen as well, albeit from a still-low base.

Overall, Vietnam’s risk score has improved by two points, to 50.

Latvia

In the latest review of our operational risk model for Latvia, the score for one category has improved and two categories have been upgraded.

The score for financial risk has strengthened by eight points, to 38. Imbalances had built up in the pre-crisis period, with labour costs rising steeply and the economy rapidly becoming uncompetitive. The authorities decided to undertake an internal devaluation in 2009, as the currency was pegged to the euro at the time, which saw wages plummeting relative to productivity in 2009-11, and a resulting dramatic reduction in unit labour costs. We now believe that the currency is broadly in line with fundamentals, making the risk of overvaluation low, and devaluation unlikely. After excessive credit growth in the pre-crisis period the banking sector has retrenched and domestic credit has fallen. This sector has now returned to profitability, and the risk of the Swedish parent banks that own the majority of the sector pulling out is low, given that this would entail heavy losses. Latvia has now joined the euro zone, which reduces currency risk, and all three of the Latvian banks that took part in the European Central Bank’s asset quality review, completed in October 2014, passed the stress tests.

The score for tax policy risk has improved by six points, to 19. The parliamentary election in October returned the same centre-right coalition, which is committed to pro-European, fiscally conservative policies and promotes a business-friendly environment. This supports policy continuity and political stability. The fiscal accounts are under control, recording a deficit estimated at 1.1% of GDP (European System of Accounts 2010 measure) in 2014, making unexpected tax hikes unlikely. The number of tax payments currently required is just seven, and the hours spent on tax processes, 193.

The score for infrastructure risk has strengthened by three points, to 31. Riga International Airport is the largest airport hub in the Baltic states, with direct flights to more than 80 destinations in 30 countries. Plans to build an additional terminal are currently under way, after a new north terminal extension was opened in 2006.

Consequently, Latvia’s overall risk score has improved by two points, to 28.

Indonesia

In the latest review of our operational risk model for Indonesia, the score for three categories has improved, one category has been upgraded and the score for another has worsened.

The score for security risk has deteriorated by four points, to 54. The rise of Islamic State (IS) has raised fresh concerns about the threat of local terrorist attacks. Dozens of Indonesians are believed to be fighting in Iraq and Syria as members of IS, and the organisation is thought to have a small number of locally based sympathisers. Furthermore, a number of militants imprisoned for their roles in earlier terror attacks, including the 2002 Bali bombings, are scheduled to be released in 2015-16.

The score for government effectiveness risk has strengthened by seven points, to 64. The challenging business environment is set to improve, but reforms are likely to proceed haltingly. In the short term, the fractious parliament means that Joko Widodo’s government will focus on areas where progress can be made without the need for legislative assent. This will include measures to simplify business approvals, to improve the quality of public administration and to reduce corruption, particularly in key sectors, such as energy. These moves should help to improve the operating environment for foreign and local firms alike. The new government will also look to boost the effectiveness of the Anti-Corruption Commission, which has suffered periodic attempts to weaken its authority. There will be an effort to restructure oversized bureaucracies and enhance merit-based appointment and promotion in the civil service; senior posts in ministries will be filled through open competition from 2015, hence improving the quality of bureaucracy.

The score for legal and regulatory risk has improved by three points, to 65. The new government led by Mr Widodo is likely to implement more business-friendly policies over the course of its term, thereby attempting to reduce anti-competition behaviour.

The score for macroeconomic risk has strengthened by ten points, to 30. Indonesia has worked to reduce its fiscal and external deficits, which made it vulnerable to volatility in capital markets because of its reliance on external funding. The country ought to withstand the end of quantitative easing and the prospect of higher US interest rates in 2015 without the risk of large-scale capital flight, as occurred in 2013. Public debt as a proportion of M2 is forecast to average a low 15.6% a year in 2015-16, increasing the funds available to private firms and helping to bring down crowding out.

The score for infrastructure risk has improved by seven points, to 59. Although fixed-line penetration is low, Indonesia has a high level of mobile-phone use and handsets are rampant and affordable. Infrastructure improvement is a key policy of the new government led by Mr Widodo (known locally as Jokowi), and the rail network should gradually be modernised in coming years. In November 2014 Mr Widodo unveiled plans to develop mass rapid transit networks in a number of major Indonesian cities in addition to the capital, Jakarta, including Bandung and Surabaya. Rail networks are also set to be expanded in poorly connected provinces; construction of new railways in Papua, for example, is set to begin in 2015.

Consequently, Indonesia’s overall risk score has strengthened by two points, to 50.

Philippines

In the latest review of our operational risk model for Philippines, while one category has been upgraded, the score for two categories has strengthened and opposing activity has been seen in the indicating factors of another category.

The score for government effectiveness risk has improved by three points, to 61. The score has been changed based on a reassessment in comparison with other countries in the region.

The underlying indicators under the macroeconomic risk category have seen offsetting movements. The public debt/M2 ratio will remain below 60% in the next two years. Although this figure is high, it is nevertheless a stable rate of government borrowing and means that there are still funds available to businesses. There will be a moderate degree of interest-rate volatility over 2015-16 in response to policy changes; the Bangko Sentral ng Pilipinas (BSP, the central bank) will raise its main policy interest rates in the second half of 2015 as the bank looks to shore up the value of the peso amid monetary policy tightening in the US. Since July 2014 the BSP has raised interest rates twice, by a total of 50 basis points each, after holding rates steady since October 2012.

The score for financial risk has been cut by four points, to 50 owing to the ratio of private claims to GDP which stands at a relatively low 23%, indicating some improvement in the availability of credit to businesses.

The score for infrastructure risk has improved by four points, to 59. Transport has remained an area of concern. However, telephony has improved. Although the proportion of fixed-line telephones per 1,000 people is low, mobile-phone use is prevalent, at 1,045 mobiles per 1,000 people. Less positively however, massive congestion at the Port of Manila (the country’s biggest port) has caused significant delays.

Consequently, Philippine’s overall risk score has strengthened by one point, to 49.

Laos

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

The score for macroeconomic risk has improved by ten points, to 25. The Lao kip has had a small depreciation value in nominal terms in 2014, but the real exchange rate has appreciated, and it seems likely the government will seek to control the pace of the kip’s depreciation in 2015-16 as part of attempts to ward off higher consumer price inflation. Inflation fell to 3% year on year in October, and looks likely to remain fairly low, in line with regional trends and our forecast for only a small depreciation of the kip.

Consequently, Laos’s overall risk score has strengthened by one point, to 59.

Ireland

In the latest review of our operational risk model for Ireland, the score for two categories has strengthened.

The score for macroeconomic risk has improved by five points, to 45. Following a significant depreciation in the external value of the euro since May 2014, we expect less movement during 2015 and 2016. Divergences between policy interest rates in the euro zone will widen, but this has been expected and so is priced into current exchange rates to a significant degree. The change in this score is largely a reflection of timing factors—as the forecast period covered by the risk briefing moves outward (to 2015-16), it captures the improved growth that comes with recovery. This effect is bolstered by the fact that Ireland’s recovery in 2014 has been more rapid than was widely expected. Although we are forecasting very low inflation in both 2015 and 2016 (annual rates of 0.5% and 0.6% respectively), any risk of a dip into deflation is driven more by falling energy prices rather than by a collapse in demand following an economic crash.

The score for financial risk has strengthened by four points, to 38. The improvement largely reflects the fact that much of the euro’s depreciation has already occurred. The euro, which has the structural support of a widening current-account surplus, has been helped by the new-found stability in the weaker countries on the periphery, and the relatively attractive interest rates there have lured investors. We assume that this stability will endure in 2015, but acknowledge risks to our central scenario.

Consequently, Ireland’s overall risk score has improved by one point, to 26.

Ethiopia

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

The score for legal and regulatory risk has improved by five points, to 73. The legal and institutional framework for the protection of intellectual property rights in Ethiopia is adequate, lowering the risk of violation. However, the country’s record on implementation and enforcement of the rules is more patchy. The Constitution includes measures protecting private property. The investment proclamation also provides investment guarantees against expropriation and nationalisation, stating that these may only occur for public interest and in compliance with the requirements of the law. However, enforcement of this is also more questionable.

Consequently, Ethiopia’s overall risk score has strengthened by one point, to 60.

Brunei

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

There have been opposing movements in the underlying indicators of the macroeconomic risk category, for which the score has improved by ten points, to 20. The risk of recession has fallen as year-on-year GDP growth turned positive once again in the second quarter of 2014 owing to the reduced pace of decline in oil and gas output. A recovery in oil and gas output is likely over the forecast period as maintenance work on production facilities comes to an end, helping to lift annual GDP growth to around 2.7% in 2015-16. However, price instability is likely to rise according to the latest consumer price inflation data, which highlight the way in which falling global food and fuel prices feed through into domestic prices. These factors will play a role in keeping inflation slightly negative, at -0.2% to -0.3% in 2015-16, assisted by the strength of the Singaporean dollar to which the Bruneian currency is linked.

Overall, Brunei’s overall risk score has improved, from 32 to 31.

Azerbaijan

In the latest review of our operational risk model for Azerbaijan, the score for three categories has strengthened and one category has been upgraded.

The score for security risk has improved by three points, to 36. Azerbaijan has not suffered a significant terrorist incident for several years. The most recent attack occurred in January 2012, when the Azerbaijani National Security Ministry disrupted a terrorist plot, reportedly backed by Iran, to attack prominent foreigners in Baku. Azerbaijan co-operates closely with the EU and US on counter-terrorism and it has relatively capable counter-terrorism and law enforcement agencies.

The score for macroeconomic risk has strengthened by five points, to ten. There is a risk that interest rate volatility could be higher than currently forecast owing to slowing growth. Nevertheless, we believe it will remain low as the banking sector is well capitalised, the currency peg will remain in place and the financial sector remains small as a share of GDP. As a result, the risk of interest rate volatility has reduced.

The score for foreign trade and payments risk has improved by four points, to 39. The score for capital controls has been adjusted as the result of a benchmarking exercise. Overall there are few restrictions on converting or transferring funds linked to investment into foreign currency. Firms do not encounter problems in obtaining foreign exchange. There is a residual risk that the government could introduce restrictions, given that a fixed exchange rate exists, if the currency came under pressure.

The score for infrastructure risk has strengthened by three points, to 50. Azerbaijan has invested heavily in infrastructure renewal in the last few years. According to the World Bank in 2011 55.6% of roads were paved, which compared moderately well in international comparison.

Overall, Azerbaijan’s risk score has improved by one point, to 50.

DOWNGRADES

Sierra Leone

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

The score for political stability risk has worsened by five points, to 55. The authorities’ inadequate response to tackling the ongoing Ebola epidemic has fuelled resentment towards the government and caused sporadic protests across the country. As the economy contracts in the wake of the epidemic, with mining operations suspended and people’s livelihoods undermined, frustration will grow further. The government’s ability to mitigate the impact of lower incomes is limited and the risk of social unrest will remain high.

The score for macroeconomic risk has weakened by 20 points, to 55. The authorities have failed to contain the Ebola outbreak, which has disrupted economic activities across the country. Public investment projects have been postponed, trade has fallen as travel restrictions have been imposed, businesses have closed, and farmers have been unable to harvest their crops. In addition, iron ore prices have fallen drastically in 2014, which has forced African Minerals to put the country’s largest mine under care and maintenance. Overall, the effects of the Ebola epidemic and the low iron prices will cause the economy to contract in 2015 before staging a modest rebound in 2016.

Overall, Sierra Leone’s risk score has worsened by three points, to 60.

Spain

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

The score for political stability risk has worsened by ten points, to 35. The year 2014 has seen the rapid rise of the anti-establishment Podemos party, which has a political platform significantly more radical than either of the two mainstream parties. Nonetheless, the risk posed by the party is mitigated by a number of factors: its surge may prompt a grand coalition between the centre-right and centre-left, which could lead to important institutional reforms; also, it has already begun toning down some of its rhetoric in order to reassure voters and markets that it will not foster instability.

The score for government effectiveness risk has weakened by seven points, to 36. Regardless of whether it is in government, the rise of Podemos is likely to influence the political agenda to a very large extent in the run-up to the next general election in late 2015. This has increased the risk of policy moving in directions that are damaging to business. Further revelations of corruption involving senior national and regional politicians have highlighted the fact that efforts to root out corruption still have a long way to go. One of the factors behind the rupturing of the political mould in 2014 has been a sharp increase in public anger at the extent of corruption in Spain.

The score for macroeconomic risk has deteriorated by five points, to 60. We expect prices to fall on average by 0.1% in 2014 and to pick up to positive inflation of just 0.2% in 2015. On a monthly basis, Spain has been in deflation for much of the second half of 2014. We expect a gradual uptick in 2015, but the risks have clearly increased of Spanish prices declining on average over the full year in 2015 or 2016.

Consequently, Spain’s overall risk score has worsened by two points, to 28.

Afghanistan

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

The score for tax policy risk has worsened by six points, to 50. According to the latest World Development Indicators, the total tax rate as a percentage of commercial profits stands at a relatively low 35.8%. However, the corporate tax rate may climb in 2015-16 as the government needs to raise revenue to narrow a large fiscal deficit.

Consequently, Afghanistan’s overall risk score has deteriorated by one point, to 75.

Belarus

In the latest review of our operational risk model for Belarus, the score for two categories has worsened.

The score for macroeconomic risk has deteriorated by five points, to 90. Following the rouble crisis in December 2014 we now expect that Russian real GDP will contract by 3.5%. This will weigh strongly on Belarusian growth, as around one-quarter of its GDP is accounted for by exports to Russia.

The score for foreign trade and payments risk has worsened by four points, to 75. The overspill of the rouble crisis could have a significant impact on Belarus, both by reducing inflows of foreign currency and raising devaluation expectations at home. To this end, at the end of December 2014 the government imposed a 30% tax on purchases of foreign currency.

Consequently, Belarus’s overall risk score has deteriorated by one point, to 69.

India

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

The score for infrastructure risk has worsened by three points, to 59. The fact that India does not have any deep water ports (the nearest is Colombo, a large transshipment hub for India) indicates a fundamental weakness in the port sector, and something that will need to be addressed for India to become a serious exporter.

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

Niger

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

The score for macroeconomic risk has worsened by five points, to 20. Dependency on highly volatile, rain-fed agricultural output will continue to cause large swings in GDP growth. This coupled with falling oil prices (which could cause delays to planned investments in the country’s nascent oil sector), means there is a moderate risk of recession in 2015-16.

The score for labour market risk increased by four points, to 86. The authorities have shown an increasing willingness to clamp down on workers’ rights and labour protests. Some activists have been arrested and the responsible authorities have refused to authorise demonstrations, saying that the marches pose threats to public order.

Consequently, Niger’s overall risk score has worsened by one point, to 64.

Slovenia

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

The score for foreign trade and payments risk has deteriorated by eight points, to 29. Russia is a major trading partner for Slovenia, accounting for 5.4% of Slovenia’s exports in 2013 and supplying 75% of Slovenia’s oil and gas imports. EU trade sanctions on Russia in response to the crisis in Ukraine, and retaliatory sanctions by Russia, therefore have significant economic implications for Slovenia.

Consequently, Slovenia’s overall risk score has weakened by one point, to 27.

NO NET CHANGE

China

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

The score for labour market risk has worsened by four points, to 61. Economist Intelligence Unit data suggest that the relationship between earnings and productivity growth has become less favourable in recent years. Real manufacturing productivity growth has been on a slowing trend since 2007 while expansion in real manufacturing earnings remains elevated. Government support for wage growth remains strong, and the labour market tight, which means wages may rise in excess of productivity gains in 2015-16.

The score for infrastructure risk has strengthened by four points, to 34. Internet connectivity is improving rapidly and the government is investing heavily into IT infrastructure in major cities. The number of Internet users as a proportion of the population is rising rapidly as well.

Overall, however, China’s risk score has remained unchanged, at 43.

Estonia

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

The score for government effectiveness risk has strengthened by seven points, to 29. Excessive bureaucracy or red-tape poses a lesser risk, as reflected by Estonia’s high rank in the World Bank’s ‘Ease of Doing Business’ index for 2015, which is 17 out of 189 countries. It takes 4.5 days, on average, to start a business via an online application. This is less than half the number of days it takes for OECD countries on average (9.2 days). There are four procedures involved, compared with 4.8 in the OECD. In terms of human rights, in 2012 the country was elected to become a member of the UN Human Rights Council (UNHRC) for the term 2013-15 and, as such, Estonia is active in defending human rights. This significantly lowers the risk of any company’s reputational risk being endangered by basing themselves in the country.

The score for foreign trade and payments risk has strengthened by 15 points, to 21. According to the World Bank’s data, excessive protection in Estonia has lessened. The weighted average tariff rate (on all products) was 1% in 2010-14, down from 1.1% in 2005-09 and 1.6% in 2000-04. The Bank’s measure of the burden of customs procedures puts Estonia at the more efficient end of the scale, with a rating of 5.3. This reflects a reduction in non-tariff barriers. The risk of capital controls has also fallen. Prudential measures taken by the authorities have put the financial system in a reasonable position to withstand changes in short-term capital or foreign-exchange flows, owing either to competitive pressure or market forces, in the event of a crisis.

The score for tax policy risk has worsened by 18 points, to 31. The rate of corporate taxation has gone up substantially. According to the Bank’s data, Estonia’s total tax rate as a proportion of commercial profits was 49.3% in 2014.

The score for labour market risk has improved by three points, to 29. The supply of skilled labour has increased. Unicef puts Estonia’s adult literacy rate at 99.8% of the population in 2008-12, which is very high by international standards.

Overall, however, despite these major changes in its underlying categories, Estonia’s risk score has remained unchanged, at 26.

France

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

The score for political stability has strengthened by five points, to 25. Although the economy has stagnated for much of the year, the public mood has eased during 2014 following a period in late-2013 when the government was forced into a number of reverses on its tax policy.

The score for macroeconomic risk has weakened by five points, to 50. Disinflationary pressures have picked up across the euro zone. Although some of these pressures—notably declining oil prices—have a potentially positive impact via rising real incomes, the downward trend of consumer price inflation has made the economies of the euro zone more vulnerable to disinflationary pressures resulting from weak demand conditions.

Overall, however, France’s risk score has remained unchanged, at 24.

Hong Kong

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

The score for macroeconomic risk has increased by five points, to ten. The outlook for interest rate stability has deteriorated, somewhat, given the prospect of changes in US monetary policy in 2015-16. Hong Kong’s interest rates are tied to policy interest rates in the US, owing to the peg between the US and Hong Kong dollars. As the US Federal Reserve (the central bank) moves to increase rates in 2015, those in the territory look set to follow. After a long period of low, stable interest rates, this may cause problems for some debtors in Hong Kong.

Overall, however, Hong Kong’s risk score has remained unchanged, at 13.

Iraq

In the latest review of our operational risk model for Iraq, while the score for two categories has worsened, the score for three others has strengthened.

The score for macroeconomic risk has worsened by five points, to 45. Although we are forecasting relatively strong real GDP growth (5.4%) in 2015, mainly due to an expansion in oil production, there is a significant downside risk to this forecast given the conflict underway with the Islamic State and the possibility of a breakdown in the deal between the Kurdistan Regional Government and federal government that is essential to boost oil production in the north.

The score for foreign trade and payments risk has improved by three points, to 54. The slide in oil prices increases the risk of a balance of payments crisis. However, foreign-exchange reserves remain high (US$67bn), which should mitigate the risk of a crisis if the decline in oil prices is not too prolonged. The tariff system remains confused, with implementation of law 22 of 2010, which set new tariff rates, not universally applied. However, Iraq has little in the way of domestic industries to protect through tariffs, and the rates are largely not discriminatory.

The score for financial risk has worsened by four points, to 75. The sharp decline in oil prices at a time when the US dollar has been strengthening against freely floated currencies puts into question the sustainability of the peg. However, given Iraq’s sizable foreign exchange reserves, there is only a moderate risk of the peg being removed and the currency devaluing.

The score for tax policy risk has improved by six points, to 63. The total corporate income tax rate averages 14.3% of profits, according to the World Bank’s latest Doing Business report, and the total tax rate averages 27.8%. These are very low by international standards.

The score for labour market risk has strengthened by three points, to 68. Unions are extremely weak and union activists, particularly in the oil sector, have been frequently harassed by the government. In part this is a legacy of the Saddam Hussein regime, which did not permit independent unions or strikes. The constitution formally grants freedom of association, but it has yet to be implemented through a new labour law.

Overall, however, Iraq’s risk score has remained unchanged, at 74.

Italy

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

The score for macroeconomic risk has improved by five points, to 65. Italy has not yet emerged from a two-and-a-half year long recession, but we are forecasting economic growth will resume in 2015 and pick up moderately in 2016. Fiscal austerity will be eased in 2015 and our baseline scenario remains that a recovery in the wider euro area will take hold in 2016. However, the risks to our Italian and global economic forecasts are still firmly on the downside.

However, the overall risk score for Italy has remained unchanged, at 37.

Mali

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

The score for security risk has weakened by four points, to 54. Slow progress on improving security in the northern parts of the country and failure to contain the ongoing Ebola epidemic will increase the risk of violent protests erupting. Although they are unlikely to threaten the government’s hold on power, the protests could cause some disruptions to business operations in the short term.

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

New Zealand

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

The score for macroeconomic risk has strengthened by five points, to 30. Amid falling global commodity prices, the central bank of New Zealand believed that the New Zealand dollar was overvalued against the US dollar in the second half of 2014. The currency appreciated and depreciated in equal measures in the first and second half of 2014. The central bank’s decision to intervene, in a bid to drive down the value of the New Zealand dollar, contributed to exchange-rate volatility in the third quarter of 2014. We expect the central bank to refrain from market intervention in 2015, dampening exchange-rate volatility in that year.

Overall, however, New Zealand’s risk score has remained unchanged, at 15.

Oman

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

The score for government effectiveness risk has improved by three points, to 61. The authorities are stepping up attempts to root out corruption. A succession of trials has taken place over the past 18 months in which senior company executives and government officials have been sentenced to lengthy prison sentences and handed large fines indicating that the authorities are taking corruption seriously.

Overall, however, Oman’s risk score has remained unchanged, at 35.

Papua New Guinea

In the latest review of the Papua New Guinea risk model, there have been opposing movements in the underlying indicators of the macroeconomic risk category, which retains a score of 40. Rising exports of liquefied natural gas (LNG) will support the kina from 2015, allowing for some appreciation of the currency and a reduction in the exchange rate’s volatility. Less positively, inflation is forecast to be at a relatively high 6.3% in 2015 and 7.8% in 2016. The forecast of high inflation is due to the likely effects of increased demand due to increased government spending, and cost pressures due to new LNG and mine infrastructure projects.

Consequently, Papua New Guinea’s overall risk score has remained unchanged, at 53.

Romania

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

The score for security risk has strengthened by three points, to 18. Hostility to foreigners or private ownership is not really an issue in Romania, despite there being large numbers of people who feel that they have not benefited from the transition to capitalism these past 25 years. This disappointment tends to be directed against the political elites rather than foreigners or owners of business.

The score for macroeconomic risk has deteriorated by five points, to 40. Public debt is relatively low in absolute terms and as a percentage of GDP, at less than 40%. However, public debt as a percentage of M2 is high, at a forecast 57.4% in 2015 and 63.9% in 2016, thus increasing the risk of crowding out.

Overall, however, Romania’s risk score has remained unchanged at 37.

Serbia

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

The score for macroeconomic risk has weakened by five points, to 60. The risk of recession has increased as the economy entered a triple-dip recession in 2014, with an estimated full-year contraction of real GDP of 1.8%. We forecast that although growth will return in the latter part of 2015, the economy will contract again for the year as a whole, by 0.4%.

Overall, however, Serbia’s risk score has remained unchanged, at 48.

Singapore

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

The score for political stability risk has deteriorated by five points, to 25. Demonstrations, although still rare, have increased in number in the last two years. Members of Singapore’s opposition parties have attempted to frame Hong Kong’s Occupy Central with Peace and Love disobedience movement as a call to action for disaffected Singaporeans. While unlikely, it is possible that the thirst for more vibrant democracies in the region could lead to increased turbulence in Singapore.

The score for macroeconomic risk has improved by five points, to 30. This was changed to reflect the LCU:SDR scores for 2015 and 2016 which are 4% and 5% respectively, substantially lowering the risk of exchange rate volatility.

Overall, however, Singapore’s risk score remains unchanged, at 12.

Sudan

In the latest review of our operational risk model for Sudan, the score for one category has improved and the score for two other categories has worsened.

The score for political stability risk has strengthened by five points, to 75. Having repeatedly said that he would not stand, the current president, Omar al-Bashir, has been selected by the ruling National Congress Party as its candidate for the next presidential election in April 2015. With the advantage of incumbency (and a probable boycott by several opposition groups) Mr Bashir is likely to win, lessening the chances of sudden changes in the decision-making process. However, it is worth noting that the election could prompt an upturn in public protests.

The score for macroeconomic risk has deteriorated by five points, to 80. In September 2013 Sudan unified its three official exchange rates. However, the resultant official rate of SDG5.7:US$1 is still under pressure, with hard-currency shortages and exchange controls meaning that of late the US dollar fetched around SDG9.5 on the loosely tolerated black market.

The score for tax policy risk has worsened by six points, to 56. With oil income depressed after South Sudan’s independence in July 2011 and the recent slump in oil prices, the government is likely to seek alternative sources of revenue. With this in mind, the government may choose to hike corporate taxes, having earlier lifted indirect taxes in July 2012.

Overall, however, Sudan’s risk score has remained unchanged, at 78.

Tajikistan

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

The score for macroeconomic risk has worsened by five points, to 50. The bleak outlook for the Russian economy, due to the imposition of phase three Western sanctions, lower oil prices and the falling rouble will negatively affect Tajikistan’s economic growth prospects over the forecast period. Remittance, trade and investment flows from Russia will be lower.

However, the overall risk score for Tajikistan has remained unchanged, at 71.

Togo

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

The score for macroeconomic risk has worsened by five points, to 30. Under our central scenario, the CFA franc’s peg to the euro will stay at its current rate of CFAfr656:€1 during the forecast period, as the risks to macroeconomic stability from a one-off devaluation outweigh the potential benefits of a cheaper currency to the region’s exporters. There is some uncertainty about the recovery in the euro zone, however, which could prompt significant volatility. Nevertheless, the risk of one or more countries leaving the euro—which would raise a major question-mark over the future of the euro-CFA franc peg—remains low for the time being.

However, the overall risk score for Togo has remained unchanged, at 59.

Turkey

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

The score for security risk has deteriorated by eight points, to 54. The possibility of a terrorist attack has increased in line with Turkey’s growing problems with its neighbour, Syria, with which it shares a long and porous border. The antipathy of the Turkish president, Recep Tayyip Erdogan, to his Syrian counterpart has blinded him to other Syria-related risks, such as the consequences of Turkey allowing its border regions to be used as a staging post for jihadi militants entering Syria. With most commercial activity located much further to the west of Turkey, any incidents in the south-east are unlikely to cause significant disruption for the vast majority of businesses. However, the city of Istanbul has previously been targeted by Islamist terrorists and the risk of repeat attacks cannot be discounted.

The score for macroeconomic risk has strengthened by five points, to 45. The Economist Intelligence Unit is forecasting that the domestic public debt/M2 ratio will stand close to 20% in 2015 and 2016, bringing down the risk of crowding out. This reflects the government’s broadly successful management of the public finances.

Overall, however, Turkey’s risk score has remained unchanged at 47.

Yemen

In the latest review of our operational risk model for Yemen, the score for one category has deteriorated and the score for another has improved.

The score for legal and regulatory risk has strengthened by five points, to 73. The World Bank’s 2015 Ease of Doing Business report ranks Yemen at 85th out of 189 countries as regards enforcing contracts. This process is a little quicker and requires fewer procedures than the Middle East and North Africa regional average, although it tends to cost a little more. Based on this assessment, we have slightly revised up our assessment of the speed and efficiency of the judicial system, albeit it is still poor on both counts. Yemen joined the World Trade Organisation (WTO) in June 2014, and one of the conditions of its membership was to fully implement the TRIPS (trade-related intellectual property rights) provisions by 2016. Although no new laws have yet been passed to implement TRIPS, we expect that the authorities will now take intellectual property more seriously, albeit nowhere near international best practice.

The score for financial risk has worsened by four points, to 92. The riyal has become overvalued as a result of a dollar peg during a period of high domestic inflation. Our base scenario is that the peg will remain in place until the end of the political transition period, and at least until 2016, although there is a risk that it will be dropped sooner if oil prices remain low and foreign-exchange reserves are depleted.

Overall, however, Yemen’s risk score has remained unchanged, at 73.

 

Source: EIU