In the framework of its regular review of short-term political risk classifications, Credendo has upgraded six countries (Guyana, Malaysia, Micronesia, St. Lucia, Suriname and Vietnam) and downgraded three countries (Ethiopia, Maldives and Paraguay).
The net evolution of short-term political risk ratings is positive, with upgrades exceeding downgrades. Those results are fuelled by improving external liquidity conditions, gradually strengthening economic activity and rebounded commodity prices (especially of oil in the past few months). In the coming months, commodity prices are likely to remain relatively stable above their 2016 average level. It should contribute to support liquidity indicators for commodity-exporting countries. However, the looming risk of increasingly protectionist trade policies and tensions is like a sword of Damocles hanging over global economic performances.
- Ethiopia: downgrade from 5 to 6
Ethiopia’s external liquidity is under pressure because of rising short-term debt which resulted from infrastructure developments and the recent drought. Violent anti-government protests show that ethnic tensions are on the rise in the country, though for now, they remain contained thanks to the state of emergency imposed in October. Protests have been partly directed towards foreign investors, and have led to a decrease in foreign direct investments (FDI). This is particularly worrying for Ethiopia because the country has been struggling with a relatively large current account deficit and in recent years has heavily relied on FDI to fund it. It risks putting the already-low foreign exchange reserves (currently 1.9 months of import cover) further under pressure.
- Malaysia: upgrade from 2 to 1
In 2015, Malaysia’s short-term political risk rating was downgraded twice as a result of the collapse in oil prices. In 2016, over the months, the economy adjusted to external shocks – helped by a flexible Malaysian ringgit – and gradually improved, leading to a first upgrade last August. The country’s short-term debt is now at a lower level whereas foreign exchange reserves are slowly building up on the back of rising exports in key sectors (especially electronics, oil & gas and palm oil) and FDI. Price increases, including the small rebound for hydrocarbons, partly explain the export surge. In a more supportive domestic environment and given the stronger global economic outlook, Credendo has further upgraded the country to the best rating 1/7, i.e. the same risk level as until 2014.
- Paraguay: downgrade from 2 to 3
Paraguay has been enjoying a relative political stability since 2013 while its foreign exchange reserves rose in the past years to arrive at a relatively high level (covering 8.4 months of imports at the end of 2016). Nevertheless, the ‘China of South America’, as this low-cost manufacturing hub is positioning itself, also saw a sharp increase of its short-term debt to close to half of its export receipts. This evolution negatively impacts the country’s liquidity position, especially as the current account balance is expected to turn into a small deficit due to infrastructure import while prices of important export products (e.g. soybeans and oil) are relatively low. For these reasons, Credendo has downgraded its short-term political risk classification to category 3/7.
- Suriname: upgrade from 6 to 5
Suriname is slowly recovering from the economic crisis triggered by low oil and gold prices and the closure of the Suralco alumina plant. As oil and gold prices are rebounding and a new gold mine came on stream in October 2016, foreign exchange reserves are on the rise while the current account balance is expected to turn into a surplus in 2017. As the country’s liquidity vastly improved, its short-term political risk rating has been upgraded from category 6/7 to category 5/7. Nevertheless, the economic outlook remains challenging. Inflation is expected to remain high in the coming year (estimated at 60% at the end of 2016), GDP growth is likely to stay in negative territory in 2017 (after a contraction of 9% in 2016) and bank balance sheets are deteriorating, increasing the risk of a credit crunch.