In the framework of its regular review of short-term political risk classifications, Credendo Group has upgraded seventeen countries (Albania, Argentina, Brunei, Colombia, Comoros, Côte d’Ivoire, Cyprus (Greek), Ecuador, Ghana, Grenada, Guyana, Kiribati, Liberia, Malaysia, Solomon Islands, Tonga, Vanuatu) and downgraded three countries (Mozambique, Suriname, Tuvalu).
For the first time since October 2014, the net evolution of short-term political risk ratings has become positive, with the number of upgrades largely exceeding the downgrades. However, it is too early to conclude that a new trend is emerging. As many countries have been downgraded in a recent past, the likelihood of upgrades de facto increases when macroeconomic conditions are slightly improving. All in all, the outlook for emerging and developing countries remains indeed difficult, notably due to low commodity prices, weak foreign demand, volatile investor sentiment and rising financial cost, rising indebtedness and geopolitical tensions.
- Albania: upgrade from 4 to 3
Albania’s liquidity has further improved; the foreign exchange reserves now cover more than 5.5 months of imports while the short-term debt ratio is at moderate level. Looking forward, the current account deficit is likely to remain large – at around 13% of GDP – driven by import-intensive energy-related projects. This large current account deficit is partly financed by foreign direct investments (FDI). Hence the country remains dependent on foreign investor confidence to finance its large current account deficit.
- Argentina: upgrade from 5 to 4
Argentinian international reserves were under significant pressure until late 2015. Since then, laudable policy initiatives by the new administration of President Mauricio Macri have greatly supported the country’s liquidity. This urged Credendo Group to upgrade its short-term political risk classification to category 4 (from 5).
One important step has been the decision to allow the exchange rate of the Argentine peso to float freely. Scarce international reserves are therefore no longer depleted in an effort to support the (until recently, overvalued) exchange rate. What is more, the sharp depreciation that followed the decision – along with a substantial reduction of export tariffs – has evoked a hike in export earnings (mainly thanks to increased agricultural exports).
More important still is that Argentina recently regained access to international capital markets. This access had been impeded due to a long-standing legal battle between Argentina and some of its so-called holdout creditors: investors in government bonds that refused to reschedule their claims after the huge sovereign debt default in 2001. The fact that a negotiated outcome was finally reached, is a real game changer. Indeed, the renewed borrowing option has vastly improved Argentina’s liquidity position.
- Ecuador: upgrade from 6 to 5
Despite full dollarisation of the economy, the liquidity risk in Ecuador is relatively elevated. In fact, plummeting oil prices that exacerbated fiscal and external weaknesses inspired a downgrade of the short-term political risk classification to category 6 (from 4) in January 2016.
Since then, oil prices have somewhat rebounded, however, and the IMF indeed revised its oil price projections upwards in its July World Economic Outlook (compared to the April Outlook). Moreover, Ecuador secured IMF support to cover its most urgent liquidity needs following the devastating earthquake that struck the country in April 2016. These elements imply that the likelihood of a liquidity crisis has significantly reduced in recent months. As such, Credendo Group judged that the time is right to upgrade the short-term political risk classification to category 5 (from 6).
- Cyprus (Greek): upgrade from 2 to 1
On the back of a declining euro exit risk, as evidenced by the exit from the EU/IMF 3-year bailout programme last March, Cyprus’ short-term political risk is upgraded to its pre-euro crisis level, i.e. category 1. Financial and structural reforms have been successfully implemented and are deemed to have put the country back on a path of sustainable growth. Besides, Credendo Group’s payment experience since resuming cover on short-term transactions in March 2014 has been good. The cover policy may now be relaxed, allowing cover again of transactions with the public sector. Cyprus’ public finances have indeed significantly improved, and the country has regained full access to capital markets.
- Ghana: upgrade from 6 to 5
Ghana seems to be gradually recovering from a crisis triggered by rapid fiscal deterioration, the commodity price collapse and disappointing oil production. Within the framework of the IMF support programme (since April 2015) several important reforms have been introduced and financial support packages were provided. Consequently, investor confidence is steadily recovering and liquidity levels have improved – reserves reach more than USD 4 billion again. 2016 and 2017 growth projections have become somewhat more favourable and inflation is expected to reduce as monetary tightening helped stabilise the cedi. Consequently, Credendo Group decided to upgrade Ghana’s short-term political risk classification from category 6 to 5. Even though the worst may be over, with elections due in December 2016 it remains to be seen whether fiscal discipline will be maintained. If not, the IMF could withhold support funds and the programme might go off-track, which would incite capital outflows and liquidity pressure again.
- Liberia: upgrade from 7 (off cover) to 6
Credendo Group decided to reopen restrictively for cover of short-term transactions on Liberia by upgrading the country’s short-term political risk classification from category 7 to 6. Liberia experienced a deep humanitarian and economic crisis in 2014 and 2015 following the outbreak of Ebola and the tumble of international commodity prices. Today, the country is gradually recovering from these two severe shocks. Short-term external debt accumulation is cooling down from its 2015 peak and the level of foreign exchange reserves is gently rebuilding (2 months of import cover again) thanks to solid international donor support flowing in. Accordingly, after two years of zero growth, 2016 and 2017 growth is expected to mount to respectively 2.5% and 4.7% again, driven by services, construction and increasing gold production. Nevertheless, Liberia’s liquidity position remains relatively fragile with a large deficit on its current account, principally financed by foreign aid. The outlook for Liberia’s recovery therefore very much depends on sustained relations with its development partners in the run-up to 2017 elections.
- Mozambique: downgrade from 6 to 7 (off cover)
The IMF, international donors and the World Bank suspended their financial support to Mozambique after it was revealed in April this year that the country had additional undisclosed government debts of over USD 1 billion. According to the IMF, this was one of the largest cases of inaccurate data provision it has seen in Africa in recent times. Mozambique’s current account deficit was already ballooning over the past years due to megaproject investments. As a result, foreign exchange reserves tumbled and incited the central bank of Mozambique to impose restrictive capital controls on hard currency availability. As the country is highly reliant on international donor funds and multilateral aid, the freeze of disbursements is causing a domestic liquidity squeeze and raises the risk of a balance of payments crisis and even a sovereign default. In addition, resurging political violence is encouraging more capital outflows, moving Mozambique’s short-term political risk classification into off-cover category 7.