Evaluate the level of country risk of one of the following countries. You might choose to develop a ranking or scoring approach based on the textbook listed indicators or those of another source. Presentation Due 9:00am Monday 29/11th by 9: 00am, Commentary Due Friday 3/12th 9:00am.
Answers:
On October 4, 2010, Coface upgraded its country risk ratings for three of the largest emerging countries. Turkey and Brazil have come out of the crisis with better risk ratings than before.
Country
June 2010 Rating
New Rating
Brazil
A4
A3
Estonia
A4
A4 (positive watch)
Hong Kong
A2 (positive watch)
A1
Ireland
A3
A3 (negative watch)
Latvia)
B (negative watch
B
Russia
C (positive watch)
B
Taiwan
A2 (positive watch)
A1
Turkey
B (positive watch)
A4
Brazil was upgraded to A3, its best rating to date. The impact of the crisis has been limited due to Brazil's highly diversified economy. There has been a rapid, large-scale recovery, with an expected growth rate of 7.3% in 2010 and 4.5% in 2011. Business is mainly driven by robust household consumption and investment. The strong recovery observed in 2010, with an unusual growth rate for the country, is accompanied by a monetary policy that should avoid overheating. All sectors are displaying good performances. The industrial sector continues to be the driving force behind the expansion, agriculture has recovered from its poor results in 2009 (due to the drought) and services are up significantly.
Untitled.jpgCurrently, Brazil has better-than-expected resilience and economic performance in the face of the global recession, which together with its relatively prudent economic policies should allow the country's per capita income and fiscal solvency ratios to improve steadily during the forecast period.
A prudent macroeconomic policy framework underpinned by the inflation-targeting and flexible exchange rate regimes, a strong external balance sheet, a healthy financial sector and a consensus on the main thrust of economic policies among the major political parties underpin Brazil's investment grade ratings. These strengths sufficiently counterbalance Brazil's key credit weaknesses, including its structurally weak public finances and a high public debt burden, and low savings and investment rates that constrain higher growth.
'Brazil's growth dynamics go beyond a favorable commodity price cycle and its increased macroeconomic stability, the favorable development of a middle class, attractiveness to foreign investors as a manufacturing base, and greater investment prospects related to the energy sector provide greater certainty that the country will continue to grow at a good pace.
Similar to many countries, Brazil loosened its fiscal policy in 2009. However, higher economic growth and the government's commitment to reverse last year's fiscal deterioration - as reflected by the withdrawal of most of the temporary tax breaks introduced last year, and a spending freeze of nearly 1% of GDP - should support favorable debt dynamics in 2010 and beyond.
Next, I will discuss some risks in details below and give some examples.
POLITICAL RISK
Strikes Looming
The Brazilian police force has set out plans to conduct a nationwide strike in January 2011 if its demands for increased wages are bit met. If approved, the increase will cost the government an estimated BRL45.5bn annually, making a further dent in the government's already deteriorating fiscal position. The threat of strikes reinforces our view that preventing inflation-busting wage increases, especially across the already bloated public sector, will be one of the incoming administration's main challenges when it takes office in the New Year.
Fiscal Concerns Mounting
Reports that current Finance Minister Guido Mantega will remain in his post under new President Dilma Rousseff are adding to our existing concerns that the political will to push through much-needed fiscal consolidation is lacking, despite pre-election commitments to bring down Brazil's public debt load. Further adding to market jitters will be signs that central bank president Henrique Meirelles is set to leave at the end of the year, despite pressure from the incoming administration for him to stay on until a replacement is found. Should his successor lack the same monetary hawkishness and insistence on central bank autonomy, we would question whether the monetary authorities will continue to maintain de facto independence from government.
ECONOMIC RISK
Lending Surging
Banco do Brasil has reported that its profits increased by 33% y-o-y in Q310. The increase was largely due to increases in the level of lending, with credit growth in September coming in at the fastest pace since June. While we believe that some slowdown in current runaway growth rates - Banco do Brasil's outstanding loans grew by 19% to BRL340bn in the quarter - is all but inevitable, we hold to our long-standing view that lending will continue to expand at a rapid clip well into 2011, helping to support private consumption.
Banking Sector: State Control Threatens Growth
One of our key macroeconomic themes for some time now has been that the easy availability of cheap credit has been a central driving force behind Brazil's impressive economic recovery. With many state-owned banks pushed into lending money at below-market rates by a government keen to bolster private consumption, the key risk to the banking sector is deterioration in asset quality. For now, delinquency rates in the public financial system remain low, standing at just 2.3% since June, as Brazil's robust economic recovery drives up incomes and puts repayment concerns on the back burner. However, with growth set to cool in 2011 - we are currently forecasting real GDP growth of 4.5%, down from 7.2% in 2010 - and interest rates already turning higher, we caution that this rate could start to tick up, causing deterioration in credit portfolios.
To lower the Brazil' country risk, the government also take some measures to maintain it.
Brazil: government installs financial operations tax
> Event:
Brazilian authorities have imposed a tax on financial inflows. The tax applies to short and long-term inflows but excluding foreign direct investment flows. In recent months, the Brazilian real has appreciated against the US dollar, thereby weakening Brazil's external competitiveness.
> Impact on country risk:
In 2008 Q4, the real depreciated against the US dollar, but this trend was reversed in 2009 as Brazil outperformed many other emerging countries during the economic crisis. Even though the new tax may raise some policy concerns, political risks are unlikely to deteriorate significantly in the near future. (Analyst: Pascaline della Faille, [email protected])
(Worlds: 818)
