In the framework of its regular review of short-term political risk classifications, Credendo Group has upgraded fourteen countries (Algeria, Armenia, Cabo Verde, Dominican Republic, Fiji, Iran, Kyrgyzstan, Myanmar, Nicaragua, Oman, Panama, Seychelles, St. Vincent and the Grenadines, Thailand) and downgraded two countries (Cuba and Mongolia).
In line with our previous review last August, the net evolution of short-term political risk ratings remains positive, with upgrades largely dominating. While those developments do not announce an overall positive outlook for emerging and developing countries, especially after a wave of downgrades in 2014-2015, they at least indicate an improved or normalised political situation for a few countries (Iran, Thailand) and recent economic progress (partly due to a rebound in oil prices such as in Algeria) or adjustment for others (e.g. Armenia).
- Algeria: upgrade from 3 to 2
Plummeting oil prices since 2014 have resulted in sharply deteriorating economic fundamentals in Algeria and inspired a downgrade of the short-term political risk classification to category 3 (from 2) in January 2016. Since then, there has been a rebound in oil prices, which has led to a narrowing current-account deficit and eased pressure on the rapidly declining foreign exchange reserves. Moreover, the country is preparing to speed up the diversification of its oil-reliant economy as illustrated by the new investment law and the finance law for 2017. As such, Credendo Group judges that the time is right to upgrade the short-term political risk classification to category 2 (from 3).
- Armenia: upgrade from 4 to 3
Armenia’s liquidity has further improved. Short-term debt represents slightly more than 20% of current account receipts and foreign exchange reserves cover more than four months of imports. Armenia relies on Russia as its main destination for exports and source of remittances, which represents more than 20% of current account earnings. Hence, foreign exchange pressures have further eased with the improvement of Russia’s GDP growth outlook. Even if, according to the IMF World Economic Outlook (October 2016), the current account deficit is expected to increase slightly next year from the 2.5% of GDP expected in 2016 to 3% of GDP, it remains relatively low compared to the 7.6% posted in 2014.
- Myanmar: upgrade from 5 to 4
Myanmar’s success story goes on. After unexpected political and economic opening by the military junta a few years ago, the democratic transition is proceeding smoothly under the civilian government. The stabilised political environment is benefiting investor and consumer confidence, is allowing the Burmese economic boom to continue, and justifies a short-term political risk upgrade from 5/7 to 4/7. Though foreign exchange reserves are hit by decreased gas exports and soaring imports, overall external liquidity is sufficient to finance a low short-term debt and weak debt service. Moreover, based on strong economic forecasts and a positive FDI outlook in one of the fastest growing countries in Asia, the liquidity situation is expected to improve gradually.
- Thailand: upgrade from 4 to 3
Thailand’s external liquidity is further strengthening this year through increasing foreign exchange reserves on the back of slightly improved economic performances and a widened current account surplus. In recent years, the main political risk has lain in recurrent political instability and deep society divisions. The long-awaited and feared death of Thailand’s long-reigning monarch last October will not prevent future political tensions but might at least bring political stability in the next 12 months. The latter should indeed be maintained during the official year of mourning thanks to broad respect for a venerated king but also as a result of strict lèse-majesté laws. The military junta is expected to ensure a smooth royal succession and preserve stability under the newly approved military-drafted Constitution after a peaceful referendum last summer. Hence, Credendo Group has decided to upgrade Thailand’s short-term political risk from 4/7 to 3/7.
- Mongolia: downgrade from 5 to 6
A downgrade of short-term political risk from 5/7 to 6/7 is justified by Mongolia’s current liquidity crisis resulting from a double external shock combining low mining prices, which are hitting most of its exports, and weaker demand from China. Moreover, the country faces heavy public external debt maturities in 2017 and 2018. Short-term external debt cannot be financed by insufficient foreign exchange reserves, which remain on a slow downward path. Moreover, the sharp depreciation of the Mongolian currency, the tögrög, against the USD and RMB makes debt servicing even more challenging. Hence, the government has requested an IMF programme – currently under negotiation – with the aim of notably easing liquidity pressures and helping debt obligations to be honoured. An external debt moratorium is not unlikely at some point even though the authorities are determined to maintain investor confidence and pay off debt in due time. Meanwhile, external payment delays could increase further.