On 25 April, Nepal suffered its worst earthquake in decades with a severe death toll (more than 7,000) and major physical damage. With an epicentre located north of the capital, the Kathmandu valley was particularly devastated with roads, buildings and cultural heritage destroyed. Several natural sites and Himalayan base camps were also hit by big avalanches. International aid, notably from neighbours India and China, is progressively flowing in albeit not without difficulty.

Impact on country risk

On the economic side, the earthquake comes after a period of improving fundamentals as confirmed by Nepal’s balanced budget, low public debt and surplus in its balance of payments. The quake consequences are dreadful for one of the world’s poorest countries. Until an accurate economic assessment is made, main downside risks relate to the negative impact on tourism – a major and rising growth engine –, on trade and the entire economic activity with seriously damaged transport and electricity infrastructure in the Kathmandu area (accounting for a third of the domestic economy). Infrastructure was already deficient prior to the earthquake and partly responsible for moderate GDP growth figures (around 4%) in the past ten years. As a result, major investment projects in hydroelectricity could be delayed whereas dependence on aid and workers’ remittances (which are good for 2/3 of total foreign exchange earnings) could also increase as financing sources. The natural disaster could also have political consequences: since reconstruction is expected to become the government’s national priority, a long-awaited deal on a new Constitution could again be postponed, thereby maintaining political uncertainty and continuing to hinder policy-making and economic reforms. All in all, two mitigating risk factors can still be distinguished: the key financial and consumption support from Nepali workers’ remittances (essentially transferred from the Gulf and Malaysia) and economic benefits from strategic competition between first trade partner India and China that is notably visible in the development of the high hydropower potential. The reconstruction effort promises to be long and difficult, though, and will weigh on political risk.

Analyst: Raphaël Cecchi, r.cecchi@credendogroup.com