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18 The 2012 <strong>guide</strong> to GLOBAL RISK TRENDS Falling Brics In sync with the global trend, confidence in the world’s emerging powerhouses has slipped this year, but there is still considerable variation in their individual risk profiles The glossy veneer surrounding the world’s emerging powerhouses - Brazil, Russia, India, China and South Africa (the Brics) – has lost some of its lustre, according to ECR, as all five countries have become riskier. Outside core Europe, the Brics group has seen the biggest average ECR score decline since January, and not just because of possible contagion or bank stability concerns. China slows China, still the least risky of the Brics, rising to 36th place in ECR’s global rankings, has not escaped the scrutiny. ECR’s contributors have become collectively more cautious about the country’s economic outlook over the past 12 months, as evidence mounts of a slowdown in the breakneck pace of China’s economic growth. The International Monetary Fund’s latest (July 2012) World Economic Outlook Update predicts that the world’s most populous country will grow by Government stability is considered less secure in light of the civil protests that have followed the return of Vladimir Putin as president, and scepticism over the president’s avowed political reforms” 8% this year, down from 9.2% in 2011 and 10.4% in 2010. It seems that the world’s main economic engine is shifting down a gear (or two). As Olivier Vojetta, head of global market research at FM Capital Partners, and one of ECR’s contributors, states: “We have been seeing increasing signs of trouble brewing in the most populous nation in the world. Business confidence seems to be drying up as banks, for the first time in more than seven years, may fall short of their loan targets.” Set in a longer-term context, China’s ECR score has changed little over the past decade, even though its relative ranking has improved. China’s failure to improve its score is indicative perhaps of the failure among the Chinese elite to convince international economists and risk experts that its strong economic growth has been matched by improvements to the business environment, rule of law or political environment. And China’s political risks have begun to rise lately, not only because of corruption and governance issues, but also due to heightened uncertainty surrounding the leadership transition in October, which has led to more than the usual unrest among party factions. Interestingly, the risks associated with the regulatory and policy environment in all of the Brics countries have increased in 2012, except for India, which already has a low
The 2012 <strong>guide</strong> to GLOBAL RISK TRENDS 19 score. It suggests, in part, that credibility in the legal frameworks governing the Brics’ financial systems and investor regimes is waning. This is particularly so for Russia, which has the lowest score of any Brics nation for regulatory policy, and has seen the largest fall so far this year. ECR’s regulatory and policy environment indicator aims to measure how well policy is formulated and/or implemented, by awarding a score ranging from zero, where no regulatory environment exists, to 10, an extremely consistent, wellenforced environment where government benevolence exists. It can therefore provide some indication of the credibility of the legal framework governing financial systems. The low score for Russia – only 3.5 out of 10 - contrasts with the country’s improved rankings in the World Bank’s Doing Business report, an annual study of business regulations. ECR contributors clearly still lack faith in the government’s determination to deal with the issue. Brazilian resilience Brazil, meanwhile, is proving to be the most resilient of the Brics, with its overall ECR score falling the least of all during the past 12 months. This might reflect the substantial government stimulus under way to enliven Brazil’s suddenly moribund economy and prevent unemployment from rising, efforts to support its foreignexchange reserves and its relatively stable political environment. Brazil is one of Latin America’s highest-rated sovereigns and one of the most closely watched markets in the world. Its banking system is considered more stable than China’s, but the two countries are also making efforts to face up to the world’s challenges together. Trade and investment pacts signed between them, coupled with a $30 billion currencyswap arrangement in June, are forming “ China’s failure to improve its score is indicative perhaps of the failure among the Chinese elite to convince international economists and risk experts that its strong economic growth has been matched by improvements to the business environment, rule of law or political environment a closer bond between Asia and Latin America’s chief powerhouses as a bulwark against global risks. Meanwhile, domestic factors – including a weak business environment – have played a role in India’s increased risk. And there was a big drop in ECR contributors’ assessment of India’s bank stability between February and March. These concerns were highlighted by Barclays Bank in Asiamoney (‘India bank credit quality to remain sluggish into 2013’), which stated: “The current economic slowdown, which has taken a toll on the Indian economy, has led to a decline in credit quality and increase in the levels of restructuring. These issues are not expected to be resolved next year.” Risks surrounding corruption and information access/transparency in India have increased, suggesting it will take far more than the Central Vigilance Commission’s e-initiative for web-based reporting – despite being praised by the World Bank – to bring about real change in the country’s endemic climate of graft. India’s regulatory and policy environment also appears to have deteriorated in the eyes of ECR contributors. Yet, whereas India’s economic assessment score is lower than Russia’s, its political and
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