In the framework of its regular review of short-term political risk classifications, Credendo has upgraded five countries (Egypt, Ghana, Iraq, Mauritania and St. Martin) and downgraded three countries (Sri Lanka, St. Vincent and the Grenadines, and Turkmenistan).
During the second quarter of 2017, the number of upgrades exceeded the downgrades for the short-term political risk. The slight rebound in commodity prices, a sustained Chinese growth, a firmer world demand and macroeconomic adjustments are some of the main factors explaining better economic performances and progressive liquidity improvement for several emerging countries. Still, the more favourable global economic context is facing large uncertainties, from the level of commodity prices, to geopolitical developments and trade protectionism. Therefore, recent improvement in political risk might prove to be fragile for many countries, especially commodity exporters.
- Egypt: Since the central bank decided to let the currency float in November last year, Egypt’s foreign-exchange reserves have increased by almost 50%. The devaluation has also led to an increase of exports and investments. This is likely to reduce the current-account deficit and make it easier to finance it. As a result, Credendo decided to upgrade the short-term political risk from category 5/7 to category 4/7.
- Ghana: Ghana’s economic context has been improving, with overall GDP growth projected at about 6% in 2017. This reflects a strong increase in oil production, against the backdrop of the contractionary impact of the budgeted fiscal adjustments. Also the current-account deficit is narrowing and short-term debt is on the decline. Based on these improving indicators, Credendo decided to upgrade Ghana’s short-term political risk classification by one notch, from category 5/7 to 4/7.
- Iraq: Credendo downgraded the short-term political risk to category 7/7 and went off cover in 2014 when IS was approaching Bagdad. Recently, the security situation has continued to improve and the political situation has stabilised. With international support, the territory of IS has been sharply reduced in the past months. The result is that IS currently only holds territory in the north-west of the country close to the Syrian border, around the city of Hawija and parts of the city of Mosul. Therefore the short-term political risk is upgraded from category 7/7 to 6/7. However, the cover policy is restrictive and coverage is only provided for debtors in Bagdad and the south of the country.
- Sri Lanka: The country has suffered a gradual drop in foreign-exchange reserves since 2015. Last January, their reported level was more than 15% lower y-o-y. Faced with a more uncertain global environment, goods exports – notably due to adverse weather conditions – and FDI inflows indeed contracted in 2016. In a context of fiscal consolidation and monetary tightening, they contributed to bring GDP growth to a lower level at 4.3% (from 4.8% in 2015). Given the country’s external liquidity deterioration, also including the pronounced jump of its short-term debt, Credendo has raised Sri Lanka’s short-term political risk from 3/7 to 4/7. Looking ahead, the support from the current IMF programme, stronger global demand and new infrastructure projects should be favourable to future economic developments and help Sri Lanka’s liquidity position to slowly improve.
- Turkmenistan: Being highly reliant on oil and gas as sources of current-account receipts, the country was not immune to the fallout of the low oil prices. Indeed, current-account receipts dropped sharply which led to a large current-account deficit of more than 20% of GDP in 2016. This year, the current-account deficit is likely to narrow somewhat but would remain very large. As the authorities have introduced exchange restrictions and as short-term debt is on the rise albeit from a low level, Credendo decided to downgrade the country’s short-term political risk to category 6/7.