In the framework of its regular review of short-term (ST) political risk classifications, Credendo has upgraded seven countries (Barbados, Egypt, Maldives, Montenegro, Qatar, Timor Leste and Western Sahara) and downgraded four countries (Bahrain, Kenya, Panama and San Marino).
Bahrain: downgrade from 3/7 to 4/7
Government’s failure to keep a lid on spending and to increase fiscal revenue ever since oil prices decreased four years ago led to significant economic challenges. The current downgrade of the short- term political risk classification reflects the fact that Bahrain’s liquidity situation remains significantly under pressure, the most recent foreign exchange reserves data indicates that they fell below one month of import coverage at the end of August 2018. Additionally, this downgrade reflects the fact that it is uncertain whether Bahrain will be able to implement the economic reforms needed to improve its economic outlook and to release the full USD 10 bn GCC aid package. Its fiscal breakeven oil price continues to be the highest in the region. Bahrain would need to see oil prices rise above USD 100 a barrel in order to balance its budget. While the country’s access to financial markets has improved since it received the bailout package, it remains vulnerable to a confidence crisis.
Egypt: upgrade from 4/7 to 3/7
Egypt’s liquidity position has been steadily improving since the central bank decided to let the currency float in November 2016 in the light of an imminent balance of payment crisis. This had already led to an upgrade of the short-term political risk classification in June 2017 to category 4/7. After the decision to let the currency float was made, the Egyptian Pound halved in value. While this caused hardship to the population and companies that had significant foreign currency loans, it led to a steady rise in exports and to a large inflow of portfolio investments in the course of 2017 and 2018. This resulted in a constant rise in foreign exchange reserves. While the latter were only sufficient to cover an estimated 2.5 months of imports at the end of 2016, they tripled in size and were sufficient to cover 6 months of imports at the end of September 2018. By the end of 2018, it is projected that exports will rise even stronger, which is expected to reduce the current account deficit from 6.3% of GDP at the end of 2017 to 2.5% at the end of 2018. Another factor supporting liquidity has been the slight reduction in short-term external debt in the course of 2018.
Kenya: downgrade from 4/7 to 5/7
Pressure on Kenya’s liquidity situation has been mounting in recent months. This has been largely due to the strong increase in Kenya’s external debt levels. This lending is largely associated to the implementation of a number of large infrastructure projects. While this has led to strong real GDP growth, it has also increased the external debt service. Additionally the short-term external debt level has tripled since 2014 and reached a high level. As a result, Kenya is exposed to rollover risks, especially in the light of the projected rise in global interest rates. A last factor that puts pressure on Kenya’s liquidity position is the persistently high current account deficit. It is estimated to be 5.6% of the GDP in 2018, and is projected to reduce only slowly in the medium term. These elements warrant a downgrade of the short-term political risk classification to category 5/7 even though foreign exchange reserves have remained stable and sufficient to cover 4.5 months of import coverage.
Maldives: upgrade from 4/7 to 3/7
The one notch upgrade reflects Maldives’ stabilised external liquidity in 2018 – the country’s short-term debt nevertheless doubled during the first half of the year although from a low level – on the back of positive export revenue in the crucial tourism sector and a gradually decreasing current account deficit ratio. Moreover, the improved political outlook for 2019 after last September’s elections is seen as a positive political and economic factor justifying a move to category 3/7.
Panama: downgrade from 2/7 to 3/7
Panama’s downgrade of short-term political risk to category 3 reflects a deterioration of the country’s liquidity situation. The current account deficit has widened this year and is expected to remain large in 2019. Panama is a dollarised economy and is exposed to global financial turbulence and capital outflows. Tighter global financial conditions amplify the refinancing and external debt service risks while an appreciating US dollar erodes Panama’s competitiveness. Moreover, the current global trade disputes are likely to affect negatively the volume of traffic passing through the Panama Canal.