Short-term political risk: Eleven countries upgraded (incl. Brazil) and two countries downgraded

In the framework of its regular review of short-term (ST) political risk, Credendo has upgraded 11 countries and downgraded 2 countries. This positive evolution can be explained by stronger commodity prices, a slowly weakening Covid-19 impact and the recent IMF’s SDR allocations.

• Brazil: upgrade from 3/7 to 2/7

Brazil´s short-term political risk rating had been downgraded in May 2020 due to the economic crisis provoked by the Covid-19 pandemic combined with the commodity price shock. However, since the second half of 2020 higher commodity prices have been turning things around for Latin America’s largest economy. For 2021, current account revenues are forecasted to rise by almost a third thanks to higher food and mineral (iron ore) prices (accounting together for about 40% of current account revenues). As a result, Brazil is projected to register a small surplus in 2021 (of 0.4% of GDP), after more than a decade of current account deficits. That being said, 2021 is likely to remain an exceptional year. As of next year, Brazil´s current account balance is expected to fall again into a small deficit as current account payments catch up. Nevertheless, other liquidity indicators also stand at an improved level compared to last year: short-term external debt vis-à-vis current account revenues stands at a moderate level. Moreover, foreign exchange reserves remain at a high level, with about 12.5 months of import cover in June 2021 and are forecasted to stay so. As a result, Credendo has upgraded the country´s short-term political risk rating to category 2/7 – the second lowest risk category. Looking ahead, keeping this relatively good market access might be challenging given the fiscal concerns ahead of next year’s presidential elections, the potential unrest, the ongoing drought and the political tensions between president Bolsonaro and the Supreme Court’s judges.

• Chile: upgrade from 2/7 to 1/7

Chile´s short-term political risk rating had been downgraded in May 2020 amid low copper prices, which pressurised the country´s liquidity. Chile is the biggest copper exporter in the world and relies for more than 40% of its current account receipts on this metal. However, since the second half of 2020 copper prices have quickly recovered and climbed to a higher level than before the Covid-19 pandemic. As a result, the liquidity indicators of the Andean country have also steadily improved. Short-term external debt has been falling over the past 2 years and stands at a relatively modest level vis-a-vis current account revenues. On top of that, foreign exchange reserves have been rising over the past 6 months and stood at almost 5 months of import cover in June 2021, an adequate level for the country. Moreover, the country enjoys a good access to financial markets. Next to the vast improvement of liquidity indicators, the risk of violent nationwide unrest (as witnessed at the end of 2019) has receded thanks to the very swift Covid-19 vaccine rollout (Chile has been among the fastest countries in the world) and the ongoing process to rewrite the Constitution – a key demand from demonstrators in 2019. As a result, Credendo has upgraded the country´s short-term political risk rating, for the second time in 6 months, to category 1/7 – the lowest risk category.

• Kazakhstan: upgrade from 3/7 to 2/7

In 2019, Kazakhstan’s short-term political risk had been downgraded by one notch (to category 3/7) due to a sharp drop in gross foreign exchange reserves. The rating had been further downgraded from category 3/7 to 4/7 on the onset of the Covid-19 crisis amid a sharp drop in oil price that led to a sharp reduction of the current account receipts. Since then, the country has benefited from a sharp rebound in commodity prices (notably oil) and a relaxation of the OPEC+ production targets. Moreover, gross foreign exchange reserves have stabilised and have been on an upward trend again. They have received a further boost thanks to the IMF’s SDR allocation (1.11 billion SDR) delivered in August this year. The liquidity improvement had led Credendo to upgrade Kazakhstan’s short-term political risk in late 2020 to category 3/7 and more recently, in September 2021, to category 2/7.

• Maldives: upgrade from 6/7 to 5/7

Tourism is slowly recovering as the Covid-19 impact and travel restrictions are slowly easing. Nevertheless, the tourism-driven economy is still suffering from the global impact of the pandemic, notably because of the Delta variant, which brought the worst surge in cases in South-East Asia, and Chinese tourists who remain largely absent. However, since the pandemic peak of last May, the health situation has rather stabilised. The fact that vaccination is among the highest in Asia (more than 60% fully vaccinated) and is progressing rapidly in Europe bode well for a strengthening in tourism arrivals over the next twelve months. As an illustration, August saw by far its highest number of tourists this year. This is having a positive effect on the country’s liquidity as foreign exchange reserves have rebounded by 50% compared to one year ago when they were at their nadir. Foreign exchange reserves are now close to 3 months of imports. Moreover, the country will continue to benefit from the G20 Debt Service Suspension Initiative until the end of 2021. On the other hand, the current account deficit is widening notably as a result of rising oil and commodity prices. All in all, in spite of the possible continued impact of the pandemic in 2022, the improved liquidity and slowly recovering tourism (albeit still far from the pre-Covid-19 levels) justify the upgrade from category 6/7 to 5/7.

• Malawi: downgrade from 6/7 to 7/7

Malawi’s short-term political risk classification has been downgraded from category 6/7 to 7/7. The downgrade is mainly driven by a further tightening of foreign exchange reserves, shrinking to merely 1.1 months of import cover in March 2021, which implied a year-on-year drop of 40%. Even when taking into account the recent IMF’s SDR allocation for Malawi (133 million SDR – about 190 million USD), foreign exchange reserves remain at a very low level. Moreover, the current account deficit is likely to remain at a very high level, at more than 15% of GDP and 70% of the current account receipts in 2021 and 2022.