The global economy has been hit by the worst recession since World War II, but early signs of recovering are starting to appear.
Sovereign creditworthiness has rebounded modestly in the past six months, according to Institutional Investor’s exclusive Country Credit survey. Although most ratings remain well below the levels of a year ago, the latest figures reflect a belief that the global economy “has bottomed out — things can only get better,” says Sherman Hui, a risk analyst at Canadian Imperial Bank of Commerce in Toronto.
The improvement is likely to be uneven, though. Countries in Asia and Latin America, which many economists expect to lead a global recovery, have seen some of the biggest increases among all countries in their credit ratings in the latest six months. The U.S. also enjoys a modest bounce, suggesting that many analysts believe that the country that dragged the world into recession will help pull everyone out of it. By contrast, the ratings of most European countries have taken a further tumble.
“Six months ago we were at the height of the crisis and everybody was scared,” says Erwin Blaauw, a country risk analyst at Rabobank in Utrecht, the Netherlands. “We don’t see a full recovery yet, but we see signs that things are bottoming out. And by now we know which countries will be less affected.”
The average credit rating of all 178 countries included in the survey rises to 45.7 on a scale of zero to 100. That’s up 0.7 point from the previous survey, in March, but down 1.3 points from the peak level achieved in September 2008. From a longer perspective, though, the average rating remains comfortably above the level of 43.9 registered in September 2006.
Overall, 76 countries post gains of a point or more, the amount considered statistically significant, for the past six months, and 41 fall by at least that amount.
Asia leads the advance, a reflection of the region’s relative economic dynamism. Nineteen countries in the region see their ratings rise by at least a point, and only three have declines of that magnitude. “There’s a sense that the worst is over,” notes Victoria Marklew, a country risk manager at Chicago-based Northern Trust Co. “We’re starting to see stabilization and even recovery in some of their exports.”
China posts one of the biggest gains in the Asia-Pacific/Far East region; its rating rises 1.3 points, to 75.4, moving it up one place, to No. 33, in the overall ranking. Blaauw credits the government’s massive, 4 trillion yuan ($585 billion) stimulus program for the move. “That’s the reason why China is still growing,” he says. The government reported recently that the economy accelerated to a year-over-year growth rate of 7.9 percent in the second quarter from a low of 6.1 percent in the first. Most developed countries in the region also advanced, with Hong Kong and New Zealand rising by 1.1 points each and Australia gaining 0.9 point.
Japan (up 1.6 points) sees an even bigger rise. The move surprises many analysts, considering the severity of the country’s recession and the fact that Moody’s Investors Service lowered its debt rating on Japan by two notches, to Aa2, in May. On the other hand, Japan reported last month that its economy rebounded at a 3.7 percent annual rate in the second quarter.
By contrast, some other big exporters that have suffered from the global recession take a hit, with Taiwan down 1.1 points and Singapore off 0.2 point.
Asia’s emerging markets show strong gains. Cambodia jumps 5.5 points — the fourth-largest gain in the survey — because of heavy Chinese investment in the country, analysts say. India (up 2.3 points), Indonesia (up 2.6 points), the Philippines (up 1.4 points) and Vietnam (up 2.7 points) also register sizable gains.
Latin American/Caribbean countries also make great strides. The region’s average rating is up 2.2 points in the past six months, with 17 countries rising by a point or more and only five suffering declines of at least that amount. Brazil helps set the pace, with its rating rising a smart 2.8 points. “There is a sense that Brazil is increasingly larger, more stable and more diversified than a lot of emerging markets in terms of exports and export partners,” says Northern Trust’s Marklew. China recently passed the U.S. to become Brazil’s No. 1 trading partner, easing Brazil’s dependence on the U.S. Latin America’s commodities-based economies also show gains, including those of Bolivia (up 1 point), Chile (up 1.2 points), Colombia (up 1 point), Panama (up 3.3 points) and Peru (up 0.7 point). Even Argentina (up 2.8 points) and Mexico (up 0.3 point) are being swept up in the optimism.
“A lot of countries in Latin America have proven they are able to offer sound policy responses to the crisis, which is contrary to ten or 20 years ago, when the policies were basically the reason for the crises,” notes Rabobank’s Blaauw. Populist policies, on the other hand, contribute to rating declines for Venezuela (down 0.6 point) and Ecuador, whose 5.3-point drop is the fourth-biggest in the survey.
Elsewhere the picture is mixed among the traditional industrial powers. The U.S., which saw its rating tumble by an unprecedented 5.0 points in March, rebounds with a gain of 0.9 point, to reach 88.9. That is good enough to lift the U.S. to No. 11 overall, up from an all-time low of No. 15 six months ago. Survey participants characterize the rise as a vote of confidence in the Obama administration and in Federal Reserve Board chairman Ben Bernanke, whose policies are thought to have stemmed the recessionary tide in the U.S. and beyond. “The government has been very active in addressing the problems,” says Blaauw. “Six months ago it was uncertain what the effects of the government programs would be, but the uncertainty has decreased.”
There is little sign of any comparable optimism in Europe, however, as the fallout from the credit crisis continues to wreak havoc in Eastern Europe and the West keeps feeling the impact of the global recession. (The survey was conducted before last month’s reports that the French and German economies returned to growth in the second quarter.)
The Baltic states suffer some of the biggest declines among all countries, with Latvia’s credit rating plunging by 10.1 points, Lithuania’s by 7.1 points and Estonia’s by 3.9 points. All three nations relied heavily on foreign borrowings to finance strong growth earlier this decade, and all are now suffering from the contraction of global credit, notes Hubert Siply, senior economist at Bayerische Landesbank in Munich.
Further east, Ukraine falls 3.5 points, dropping from No. 88 to No. 106 in the ranking; its rating has fallen by 15.8 points, or nearly one third, in the past year. “They not only have economic problems, but also uncertainty about political developments” ahead of January’s presidential election, explains Siply. Russia (down 1.4 points) and Kazakhstan (down 2.1 points) also post declines. The recession “illustrated the extent to which Russia’s macroeconomic fundamentals are extraordinarily weak,” says Northern Trust’s Marklew.
In Western Europe, Sweden and Austria post notable declines, down 2.5 and 2.4 points, respectively. Marklew cites contagion from Eastern Europe, where Austrian and Swedish banks are among the largest lenders.
Ratings are weak across most of the rest of Western Europe, with declines in 17 of 19 countries. The moves reflect “the depth of the recession” and the fact that contingent liabilities have shot up because of bank bailouts, says Marklew. Ireland is the region’s biggest loser, dropping 5.8 points, the third-largest decline in the survey; Spain falls by 3.8 points. Both nations are reeling from collapses in their housing markets that have triggered deep recessions. Other countries took smaller but still significant hits on concern about recession and fiscal deficits. Denmark, Finland and the U.K. are all down by 1.7 points, and France and Norway are each off by 1.3 points.
A rare exception to the trend is Iceland. The North Atlantic country is up 1.5 points on optimism that the worst of its credit crisis, which saw most of its leading banks collapse last October, is over. The fact that Iceland has applied for European Union membership to secure its future also provides support, analysts say. Still, the country’s rating is down 24.8 points from September 2008.
The average rating for states in the Middle East & North Africa is up 1.1 points. Oil producers showed little change, but several politically sensitive nations advanced, including Egypt (up 1.5 points), Israel (up 1.6 points), Jordan (up 1.7 points) and Lebanon (up 3.3 points).
Sub-Saharan Africa rises by a modest 0.4 point on average, with gainers tending to benefit from stronger commodities prices, says Rabobank’s Blaauw.
Looking ahead, analysts expect emerging-markets nations to remain in the forefront of ratings improvements. Many of them, with sound policies, competitive cost levels and young and growing populations, are expected to lead the global economic recovery. These countries also have suffered less fallout from the credit woes gripping Western financial institutions.
By contrast, many analysts see Western Europe, along with Japan, continuing a slow, secular decline. When survey participants were asked which countries would suffer the most-prolonged damage from the credit crisis, Japan and the U.K. topped the list. Mark Wagstaff, a country risk manager at Australia and New Zealand Banking Group, worries that slow growth will leave some governments “with no choice but to impose stimulus packages that they can’t sustain.” By contrast, China is showing that it can grow without much help from the U.S. and Europe and, moreover, that it can pull others along in its wake.
See the September Country Credit rankings.
