In the framework of its regular review of short-term (ST) political risk classifications, Credendo has upgraded three countries (Azerbaijan, Thailand, Ukraine) and downgraded seven countries (Algeria, Bahamas, Congo DR, Dominica, Philippines, St. Barthelemy, Trinidad and Tobago).
Unlike the positive trend witnessed in the three previous quarters, the last quarter of 2017 has seen a lower number of upgrades compared to downgrades for short-term political risk. This is mainly due to some negative domestic developments as the global economic context remains upbeat. Nevertheless, commodity prices remain relatively low and cloud the 2018 outlook for many developing countries, especially in Africa.
Algeria: downgrade from 2/7 to 3/7
The Algerian government continues to struggle with the implementation of the needed economic reforms in response to the low oil prices. This has resulted in large fiscal deficits and a large current account deficit which led to a 45% drop in the country’s foreign exchange reserves between the end of 2013 and August 2017 and a depletion of the country’s Oil Stabilisation Fund. This situation motivates Credendo’s decision to downgrade the country’s short-term political risk to category 3/7.The government refuses to borrow externally and is facing difficulty in borrowing internally. Instead, the government plans to borrow directly from the Central Bank. The dismissal of Prime Minister Tebboune (who planned to tackle corruption in Algeria) after only 2 months and 21 days in office shows that implementing deep structural reforms in Algeria is very difficult. The new Prime Minister Ouyahia is expected to implement some fiscal consolidation, but no structural reforms to the economy are expected.
Azerbaijan: upgrade from 4/7 to 3/7
Azerbaijan is heavily reliant on oil, which is its main source of current account receipts and public revenues, and was thus hit hard by the sharp drop in oil prices that started mid-2014. Its foreign exchange reserves dropped sharply in 2014 and 2015 partly as the authorities used their reserves to maintain a fixed exchange rate vis-à-vis the USD. The exchange rate was devalued first in February 2015 and then in December 2015 when authorities decided to let the currency float freely. This was a very positive step as it means that authorities do no longer need to use their exchange reserves to maintain a fixed exchange rate. As a result, foreign exchange reserves stabilised in 2016 and are now on an upward trend that is likely to continue despite the recent drop. Moreover, the current account balance is likely to remain in surplus (compared to a deficit posted in 2015 and 2016) and short-term external debt to remain relatively low. In this context, Credendo decided to upgrade its short-term political risk to category 3/7.
Thailand: upgrade from 3/7 to 2/7
The Thai economy has further strengthened this year on the back of confirmed political stability and a sharp increase in foreign demand. The rising trend in exports of manufactured goods, receipts from Asian tourists and foreign direct investment have raised the current account surplus to a two-decade high above 10% of GDP.
Persistent low oil prices are an extra positive factor. As a result, Thailand’s foreign exchange reserves are up 17% since the end of 2016. The improved short-term political risk has led Credendo to upgrade the country from 3/7 to 2/7. The overall business environment has also improved this year with GDP growth expected at 3.7% - it is forecast to reach 3.5% in 2018 - and heightened investor confidence. This is reflected by an appreciating baht which is up 9% against a weaker USD this year. This overall positive trend is expected to continue in 2018 given favourable global economic prospects and likely political stability, at least until the first general elections since the 2014 military coup are held, that is late 2018 as scheduled or in 2019.
Trinidad & Tobago: downgrade from 3/7 to 4/7
Trinidad and Tobago, a refiner of crude petroleum, has been hit hard by the low oil prices. In the past two years, the country has experienced relatively elevated current account deficits (also in 2017, a deficit of 9% of GDP is expected) due to lower hydrocarbon prices. These deficits have put significant downside pressure on the country's peg to the USD and on its foreign exchange reserves. Indeed, the Central Bank of Trinidad and Tobago has a peg to the USD and has been holding the TTD at USD 6.75 since November 2016. As a consequence, foreign exchange reserves, still at the relatively high level of 9 months of import cover in August 2017, are under pressure and have dropped by more than 20% since 2014. Moreover, in the past two years, firms have been complaining of foreign exchange shortages as the amount of foreign exchange made available by the government has fallen. Therefore, Credendo has downgraded the short-term political risk to category 4/7.
Ukraine: upgrade from 6/7 to 5/7
The short-term political risk of Ukraine was upgraded to category 5/7 (from 6/7) to reflect the improvement in liquidity. Since February 2015, foreign exchange reserves have followed an upward trend (cf. graph). They now cover more than 3 months of imports. Moreover, short-term external debt has decreased in absolute and relative terms. The current account deficit is expected to narrow in 2017 as current account receipts are increasing faster than current account payments, a trend that is expected to continue in 2018. Despite the improvement in liquidity, risks remain high. Indeed, following the issuance of sovereign bonds (USD 3 billion in September 2017), the authorities might be less willing to implement crucial structural reforms (among other things pension reform – a critical condition for the fourth review of the IMF programme – land reform, measures to speed up privatisation and to tackle corruption), which could lead to further delays in the IMF programme and impede foreign investor confidence. In the Eastern region, even though heavy fighting in the Donbass has ceased, the conflict remains unresolved and sporadic surges in violence still occur.