Global Investing

Measuring political risk in emerging markets

(Corrects to say EI Sturdza is UK investment firm, not Swiss)

Commerzbank analyst Simon Quijano-Evans recently analysed credit ratings for emerging market countries and concluded that there is a strong tendency to “under-rate” emerging economies – that is they are generally rated lower than developed market “equals” that have similar profiles of debt, investment or reform. The reason, according to Quijano-Evans, is that ratings assessments tend to be “blurred by political risk which is difficult to quantify and is usually higher in the developing world compared with richer peers.

However there are some efforts to measure political risks, and unfortunately for emerging economies, some of those metrics seem to indicate that such risk is on the rise. Risk consultancy Maplecroft which compiles a civil unrest index (CUI), says street protests, ethnic violence and labour unrest are factors that have increased chances of business disruption in emerging markets by 20 percent over the past three months. Such unrest as in Hong Kong recently, can be sudden, causing headaches for business and denting economic growth, Maplecroft says. Hong Kong where mass pro-democracy protests in the city-state’s central business district which shuttered big banks and triggered a 7 percent stock market plunge last month.

As a result, Hong Kong jumped to 70th place in the index from a relatively safe 132nd place in the CUI which analyses governance, political and civil rights and the frequency and severity of incidents to assess the current and future civil unrest picture.

Hong Kong performs comparatively well in the economic, social and rights factors in the CUI, but performs poorly for democratic governance, Maplecroft says:

The scale of the protests, which has cost retailers upwards of $283 million, has seen Hong Kong move from the ‘medium risk’ category to ‘high risk’. Beijing’s response will be key to determining whether the situation deteriorates further.”

Bleak investment outlook sours mood at Russia forum

By Alexander Winning

What are the chances that Western investors will rush back to Russia if a shaky ceasefire in Ukraine leads to a more lasting peace? Pretty slim, judging by a keynote speech at a recent Russia-focused investment conference in London.

Dmitri Trenin, director of the Carnegie Moscow Centre, told the conference organised by Sberbank CIB, the investment-banking arm of Russia’s top state-controlled lender, there was little prospect of significant Western investment in Russia over the next 5 years:

I would be surprised if much foreign direct investment flowed into Russia from Germany and other Western countries. But there will be more investment coming from China.

Turkey: investment grade, peace and FDI?

Turkey’s elevation to investment grade last week may or may not be a game changer for its stock and bond markets, but the country is really hoping for a boost to FDI – bricks-and-mortar foreign direct investment  into manufacturing or power generation. Its peace process with Kurdish separatists should help.

Speaking last week at Mitsubishi-UFJ’s annual Turkey conference, Finance Minister Mehmet Simsek cited data showing an average 2 percentage-point pick-up in FDI in the two years immediately after a country moves into investment grade.

Sticky, job-creating and not prone to sudden flight, FDI is the kind of investment that Turkey, with a massive balance of payments deficit, desperately needs. Turkey does worse than most other countries on the FDI front.  Its combined deficit of the current account and net FDI is around 5 percent, Commerzbank analysts note –  wider than most emerging market peers.

India’s deficit — not just about oil and gold

India’s finance minister P Chidambaram can be forgiven for feeling cheerful. After all, prices for oil and gold, the two biggest constituents of his country’s import bill, have tumbled sharply this week. If sustained, these developments might significantly ease India’s current account deficit headache — possibly to the tune of $20 billion a year.

Chidambaram said yesterday he expects the deficit to halve in a year or two from last year’s 5 percent level. Markets are celebrating too — the Indian rupee, stocks and bonds have all rallied this week.

But are markets getting ahead of themselves?  Jahangiz Aziz and Sajjid Chinoy, India analysts at JP Morgan think so.

Ratings more than a piece of paper for Africa

By Stephen Eisenhammer

Does a sovereign credit rating from a glass tower in London or New York impact life in the country being rated? Apparently in Africa it does.

According to research by the rating agency Fitch, sovereign credit ratings significantly boost foreign direct investment (FDI) to Africa.

Credit ratings added 2 percent to Gross Domestic Product in sub-Saharan Africa each year from 1995 to 2011 through increased  FDI when compared to countries in the region which do not have a rating, Fitch said in a note.

African growth if China slows

The  apparent turnaround in Africa’s fortunes over the past decade has been attributed to the rise of China and its insatiable appetite for African commodities. So African policymakers, like those everywhere, will have been relieved by the recent uptick in Chinese economic data.

But is Africa’s dependence on China exaggerated?  A hard landing in the Asian giant will be an undoubted setback for African finances but according to Fitch Ratings.  it may not be a disaster.

Fitch analyst Kit Ling Leung estimates that if China’s economy grows at below-forecast rates of 5 percent in 2013 and 6.5 percent in 2014, African real GDP growth will slow by 90 basis points.  So a 3 percentage point drop in Chinese growth will lead to less than a 1 percentage point hit to Africa. Countries such as Angola will take a harder hit due to oil price falls but others such as Uganda, which import most of their energy, may even benefit, Yeung’s exercise shows.

Certain danger: Extreme investing in Africa

The Arab Spring, for all its democratic and political virtues,  put a big economic dent in the side of participating North African countries, particularly when it came to attracting foreign investment in 2011.

According to a recent UNCTAD report:

Sub-Saharan Africa drew FDI not only to its natural resources, but also to its emerging consumer markets as the growth outlook remained positive. Political uncertainty in North Africa deterred investment in that region.

So far, so logical. Except that simply can’t be all there is to it.

Why? Because plenty of African countries marred by political uncertainty have succeeded in attracting inward FDI.

from MacroScope:

Yet more lagging from Italy and Greece

At this stage in the euro zone crisis, we probably don't need to be reminded how uncompetitive the peripheral economies are. (Arguably, of course, they would not be economically peripheral if they were more competitive, but that is for tautologists to debate).  The United Nations, in the form of UNCTAD, has just pinpointed another weakness, however -- huge underperformance  in foreign directed investing, or FDI.

The numbers it has just released only go as far as 2010, so the real crisis cauldron has yet to come.  But they show that Greece and Italy have been punching way below their weight.

Greece has attracted a relatively small amount of foreign direct investment compared to other countries in the European Union (EU). In 2010, Greece’s share in the EU’s GDP was 1.9 per cent. In the same year, however, the inward FDI stock of Greece amounted to €26.2 billion ($35.0 billion), or less than 0.5 percent of the combined FDI stock of EU countries. Similarly, Greece’s share in the total outward FDI stock of EU countries was 0.4 per cent.

Retail volte face confirms India as BRIC that disappoints

Jim O’Neill, the Goldman Sachs banker who coined the term BRICs to capture the fast-growing emerging-markets quartet of Brazil, Russia, India and China,  has fingered India as the BRIC that has disappointed the most over the past decade in terms of reforms, FDI and productivity. New Delhi’s latest decision to put on hold a landmark reform of its retail sector will only confirm this view.

The government’s backtracking on plans to allow foreign investment in supermarkets will not surprise those accustomed to New Delhi’s record on key economic reforms. But it means India’s weak performance on FDI receipts will continue and that’s bad news for the worsening balance of payments deficit.  Speaking of the retail volte face, O’Neill said: ”They shouldn’t raise people’s hopes of FDI and then in a week, say, ‘we’re only joking’”.

Various Indian lobby groups that oppose the reforms contend that foreign giants such as Wal-Mart and Tesco will kill off the livelihoods of millions of small traders.

SWFs climbing the German wall

The Vale Columbia Center on Sustainable International Investment’s latest report on foreign direct investment looks at inward flows to Germany.  Things look like they were a bit better last year than the year before, apparently.

But buried in the report from Aschaffenburg University economist Thomas Jost is some interesting data regarding  sovereign wealth funds.

In April last year, Germany responded to concerns about the influence of sovereign wealth funds by introducing rules allowing for a review of planned acquisitions by non-EU/EFTA foreign companies and SWFs of existing German companies.