From the CEO – August 2022

Coming as little surprise to few outside the sell side of equity firms was the announcement last week by Fed Chairman Powell that higher interest rates in the US would be around for some time, adding that ‘restoring price stability [would] likely require maintaining a restrictive policy stance…’ Stocks fell on the words, with Powell making clear that ‘some pain’ will be experienced by households and businesses going forward.

For emerging markets, the news obviously wasn’t encouraging. India’s rupee weakened close to an all-time low against the greenback, and alarm bells went off once again for countries with less-than-stellar balance sheets, such as El Salvador, Kenya, and Ghana, to name a few. Interestingly, capital outflows from emerging markets continued for the fifth consecutive month, with some $39.3 billion being removed since March, according to data compiled by the Institute of International Finance. The level is close to that of the 2013 ‘taper tantrum’ when the Fed attempted to tighten policy rates, causing turmoil in among the emerging market asset class.

Clients should consult the appropriate tables of the International Country Risk Guide for data on external debt, servicing costs, and currency levels of 141 countries.

Powell’s announcement did little to help the euro, as net short positions hit their highest level since the beginning of the pandemic. Making matters worse is now talk that the energy crisis affecting the region will last past this coming winter. All eyes will therefore be on the Nord Stream pipeline from Russia and gas prices. There’s also the issue of asylum seekers entering parts of Western Europe, overwhelming processing centers and creating strains on public finances and forms of social stability. Most are coming from Ukraine but also from Syria, trying to avoid the conflicts in those countries. This was one of the consequences of the war we warned about when the Russian invasion began last February.

On a related matter, one of the most respected academic-practitioners in the field, Dr Michel-Henri Bouchet, of the SKEMA business school in Paris, sent me an interesting piece this morning on debt owed to China. The data was compiled by the World Bank but analyzed by the firm, Statista.

According to World Bank data, countries heavily in debt to China are mostly located in Africa, but can also be found in Central Asia, Southeast Asia and the Pacific. As the new preferred lender to low-income countries, China now holds 37% of these nations’ debt. Just 24% of the countries’ bilateral debt comes from the rest of the world in 2022.

The Paris Club used to hold most of the low-income countries’ debt before it was restructured and largely forgiven some 20 years ago for countries that met the qualifying criteria. It is not clear whether a similar process will be available to those holding Chinese debt. As of 2020, officially China has lent about $170bn to low- and middle-income countries, up from about $40bn the decade before.

Debt to China often comes in the form of support for infrastructure projects as part of the “New Silk Road” initiative. Such debt can be difficult to repay since they often have higher interest rates compared to those from the IMF or the Paris Club countries and they also have shorter repayment windows. The Financial Times has reported that China has had to renegotiate loans to the tune of $52bn in 2020 and 2021 – more than three times the amount restructured during the previous two years

As we look at some of the challenges facing China over the short- to medium-term – and the implications for some emerging and frontier markets that hold Chinese paper in particular – the interest rate environment globally certainly looks a little more complex – and with many more possible consequences – than what casual observers of the Fed have to this point entertained.

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We continue to receive considerable demand for the newest addition to our popular Researchers’ Dataset series – one that offers clients a more granular look at the political risk components of the ICRG, supported by 20 years of monthly data. The new series works as an excellent complement to the other data bundles announced this year affecting ESG, corruption, and internal/external conflict. Scores of academic studies have been conducted using these series, providing unique insights in asset volatility, government responses to the pandemic, and many more. Contact us for more information.

Our new book Quid Periculum? Managing Political Risk in an Age of Uncertainty, co-edited and co-authored by Peter Marber (Harvard/Aperture Investors) is now available! The book includes such diverse topics as risk forecasting techniques, reliability measures, the impact of political risk on asset prices and sovereign debt workouts. Also featured is a special roundtable discussion by some of the world’s leading voices in the field on the future of political risk, who combine to address some of the challenges presented by globalization and COVID-19.

August was another fruitful month for new and returning clients, ranging from some of the world’s top universities to the largest institutional investors throughout the US, Europe, the UK, and the Middle East and Asia. Our data are now regularly featured in the research of the IMF, Bank for International Settlements, and various central banks, such as the Bank of Italy.

PRStv kicks into high gear next month with the first of a series of podcasts with leading academics and practitioners in the field. First up will be Dr Brandon Parsons of the Graziadio Business School at Pepperdine University. Dr Parsons will shed some light on his newest research on corporate tax rates and income inequality. We are truly looking forward to this discussion, which will be posted on various social media platforms and on the PRS site.

Our discussions continue with several leading North American and European business schools to create something truly unique in the AI/data driven geopolitical sector that will benefit both academics and firms alike. As I’ve mentioned on many occasions: political and country risk can only be truly meaningful if it can be quantified over time and across jurisdictions; when it can yield exceptional empirical findings; and when it can be applied to the behavior and protection of assets. It also helps when the data have been independently back tested for the past 30+ years and have become a staple in the academic literature. Stay tuned for a series of announcements this fall.

Not only is ICRG being used by some of the world’s largest technology firms, but the data are now being incorporated increasingly into the artificial intelligence/machine learning sector, with an emphasis on ESG data!

Our ICRG political risk scoring changes were very robust in August, affecting some 110 countries (of 141) and over 125 individual political risk metrics!!

ICRG and related PRS data continue to be the gold standard of all geopolitical risk data among the scholarly and research communities. In a new piece in the IMF’s Working Paper series, a series of questions are posed: does an unanticipated change in public debt affect real GDP? And how does political risk play into this equation?

By analyzing data on gross public debt for 178 countries over 1995-2020, an unanticipated increase in the public debt to GDP ratio hurts real GDP level for countries that have (i) a high initial debt level or (ii) a rising debt trajectory over the five preceding years. On the contrary, an unanticipated increase in public debt boosts real GDP for countries that have (iii) a low-income level or (iv) completed the HIPC debt relief initiative.

As political risk affects the relationships, using our ICRG risk data, the study confirmed earlier empirical results that suggested politically risky countries tend to have a negative output response to an unanticipated increase in debt. (https://lnkd.in/gU6_xDrs)

In addition, in another recent work, using our ICRG risk data, it was found that defense spending has a negative effect on economic growth, which is aggravated during times of internal and external conflicts. See just how much in this superb empirical study of the Middle East. (https://lnkd.in/dVXqpjcK)

Thanks for your continued support, and please contact us if we can be of any assistance.

CHRISTOPHER MCKEE, PHD CHIEF EXECUTIVE

Christopher McKee is PRS’ CEO and Owner. An international political economist, global investor, entrepreneur, and author, Chris received his PhD from Queen’s University (Canada) and has been involved in the field of geopolitical risk, limited recourse financing, and private sector development for the past 25 years.