News in Charts: A closer look at recent global sovereign risk developments

Fathom’s Financial Vulnerability Indicator (FVI) is a tool that measures financial risk in 176 countries; a composite reading, made up of four underlying FVIs, is available on Refinitiv’s Chartbook. The FVI combines more than 40 years’ worth of high and low frequency, macro and financial market data in a rigorous analytical framework to provide an instant, comparable, intuitive measure of financial vulnerability. It also measures country risk to four different types of financial crisis in raw probability terms, own-country normalised terms (i.e. how risky that country is relative to its past, in z-scores) and global normalised terms (i.e. how risky it is compared to the historical average risk of all countries, in z-scores). In this News in Charts we look at some of the latest FVI-related developments in the two-week period ending 29 November 2019.

Ethiopia has been one of Africa’s success stories in recent times, with real GDP growth exceeding 7% in each of the last 15 years. The positive image was reinforced by the country’s Prime Minister Abiy Ahmed winning the 2019 Nobel Peace Prize. These factors have prompted a strong rally in the country’s bonds this year, even if the country’s external position remains somewhat vulnerable — it runs a large current account deficit and its foreign exchange reserves are less than 5% of GDP. A recent referendum held in the Sidama region seems to have unsettled investors. After several delays, the referendum finally went ahead on 20 November with the residents of the region voting to approve the formation of a separate regional state.

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This development prompted a sharp increase in the country’s sovereign bond yield, although in z-score terms (when measured over the two-week period), the move only placed the country 15th on the table of largest bond yield increases over the two-week period. The country’s currency, however, depreciated 4.2%, equivalent to 8 standard deviations. Ethiopia already has several other regional states and while the move strengthens the democratic process in the country, investors seem to have viewed it as a challenge to the PM’s control as it brings into sharper focus the prospect that other ethnic groups may seek further autonomy. Perhaps recognising this threat, three of the four parties in the country’s current ruling coalition announced that they had merged. These parties have different ethnic bases and this move provided a symbol of unity amid a perceived threat of division. Although a notable development, this news prompted a smaller reaction in the markets. Ethiopia ranks 80th and 90th in the Currency and Sovereign FVIs.

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Belarus also ranked highly on the top currency depreciators table. The country held parliamentary elections on 17 November; some western capitals had hoped that the elections would mark a further liberalisation of the country’s political system, but opposition candidates did not win any of the 110 seats up for grabs in the country’s lower parliament. Other factors that weighed on the country’s currency were data which showed that the country’s merchandise trade deficit widened in October, and the announcement by the country’s prime minister that a series of economic deals had been agreed with Russia, which was conspicuous by the absence of any agreement over oil and gas.

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Zambia’s currency depreciated, despite its central bank hiking the policy rate from 10.25% to 11.5%. The move may have been designed to shore up investor confidence, but it may well be too little, too late; Zambia is grappling with a large debt burden while economic growth slows; disruption in the country’s mining activities and a drought, which has hit agricultural output and electricity production, are among the reasons for this. Zambia has been flagging as one of the riskiest countries in the Sovereign FVI for some time and currently ranks 5th in own-country normalised terms, and 4th on an absolute basis.

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Equity market movements were subdued over the period. The only country that experienced a move of more than 2 standard deviations was Chile, where continuing civil unrest is taking its toll on the economy. South America’s showpiece Copa Libertadores football final was moved from Santiago to Lima over safety concerns and an index of economic activity released on 2 December suggested that activity in the country contracted by more than 5% in October. The government has indicated that it could loosen fiscal policy in order to appease some of the protestors. It has scope to do so with a relatively low debt burden, but it is navigating the tricky balance between doing so and maintaining fiscal credibility with investors.

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In bond markets, the largest increase in z-score terms occurred in Morocco. The country’s bonds are fairly illiquid, but the yield on the ten-year instrument (which feeds into its Sovereign FVI) jumped on 22 November a day after the country’s finance ministry announced that it had issued a EUR 1 billion bond with a maturity of twelve years. There were also sizeable increases in the bond yields of Ecuador and Lebanon, which, like Chile, are experiencing social unrest, at times violent, directed at the government. Lebanon remains in top spot on the Sovereign FVI own-country normalisation (and 3rd, behind Argentina and Venezuela, in absolute terms). A package of reforms aimed at improving the government’s finances were rejected by the country’s National Assembly. The country has less fiscal room than Chile, and it is navigating a trickier balancing act of appeasing protestors, while shoring up government finances.

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Government bonds did rally in a few countries. Yields dropped sharply in Venezuela, again, although the stripped yield to maturity on the JPM EMBI global index for the country remains well above 100%. The yield also dipped in Bolivia, which has experienced social unrest after Evo Morales stood down after a closely contested and acrimonious election campaign. The yield on Hong Kong government debt dipped; it is tempting to conclude that this is the response of the recent local election results (in which pro-democracy parties outperformed) and the US bill backing the city’s pro-democracy supporters, but most of the decline occurred before this news. There have also been violent protests and unrest in Iraq, but while the yield on the country’s bonds has increased this year, they nudged only 8 basis points higher (0.2 standard deviations) over the two-week period.

Composite FVI readings are available on Refinitiv’s Chartbook. These are comprised of readings from underlying FVIs and are updated on a quarterly basis; for the most up-to-date values and underlying FVI readings (i.e. Sovereign, Banking, Currency and Sudden Stop), please contact Fathom Consulting.