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The 2012 guide to
GLOBAL RISK TRENDS
17
Hungary’s CDS spreads – measuring the
cost of insuring against default - were
trading at 468 basis points at the end
of July, not far off the levels seen in Italy
(489bp), according to data provided by
Markit, the financial information services
company. Hungary has also slipped
down the World Bank’s Doing Business
rankings, due to tighter credit access and
a costlier company tax environment, and
its short-term economic outlook is bleak
- something that ECR contributors have
been aware of for some time as the scores
for the economic-GNP outlook indicator
have fallen. With industrial production
plummeting and business confidence
deteriorating, a 1% contraction in Hungary’s
real GDP is forecast for 2012, according to
the European Bank for Reconstruction
and Development (a 1.5% drop, says the
Organization for Economic Cooperation and
Development).
Hungary’s darkening outlook is summed up
by the International Monetary Fund’s latest
warning, following a staff visit in July: “The
Hungarian economy continues to face a
series of interconnected challenges related
to high public and external indebtedness,
strained bank balance sheets, weak
confidence, and elevated risk perceptions.
Amid a difficult external and domestic
environment, real GDP is expected to
contract in 2012 and recover modestly in
2013. Beyond the current cycle, historically
low levels of private investment and labour
participation cloud the growth outlook.”
Latin worries
And Latin America hasn’t escaped the
global risk aversion, either, even though the
region has performed comparatively better
than the CEE this year. The largest Latin
American countries are among those that
have experienced falls in their ECR bank
stability scores, for instance, contrasting
with smaller countries that have seen an
improvement. Bolivia – an exception to
the rule – has weakened the most, with
a 0.8 point drop in its bank score since
mid-2011, but other countries suffering
from increased bank risk include Argentina,
Brazil, Chile, Colombia and Venezuela – five
of the six largest countries in the region,
measured by GDP. The downgrades in part
reflect susceptibility to increased loan
default following a period of rapid credit
expansion. This has taken place against the
backdrop of a potential shake-out of the
Latin American banking sector, as stronger
regional lenders attempt to gain market
share from Spanish and Portuguese banks
divesting assets - a trend that could persist
if the eurozone crisis worsens.
But bank stability isn’t the only worrying
indicator. In Argentina, the risks of nonpayment/non-repatriation,
information
access/transparency, the country’s
institutions and its regulatory/policy
environment have all deteriorated to
alarmingly low levels. And no wonder.
As reported widely, including in Latin
Finance (‘Argentina Going South’), the
government’s pursuit of nationalization,
through oil company YPF, and other
unorthodox policies – including raising
tariffs, rationing foreign currency to
protect against capital flight, failing to
settle outstanding debts and restricting
dollar-denominated property purchases -
have increased the threat of expropriation,
weakened investor confidence and
exacerbated the uncertainty that is
weighing on the peso. As Richard Segal,
director of emerging markets at Jefferies,
states: “With Buenos Aires running out of
money, the (risk) outlook has been bleak
for some time, but particularly in the
aftermath of YPF.”