Star in the ascent

“Prediction is very difficult, especially about the future”.  A quote that has been variously attributed to individuals as diverse as physicist Niel Bohr and baseball player Yogi Berra.  

Whoever said it first, it most definitely has a ring of truth, and to prove it, here's a prediction taken from the IMF World Economic Outlook of April 2007:
“The world is expected to continue to grow robustly in 2007 and 2008—with a modest deceleration from the rapid pace of 2006 bringing growth more in line with potential and helping to contain inflationary pressures in the fifth and sixth years of the current expansion. Specifically, global growth would moderate to 4.9 percent in 2007, around 0.5 percent less than in 2006 and in line with the rate forecast at the time of the September 2006 World Economic Outlook, and maintain this pace in 2008. …among the major advanced economies, the slowdown in year-over-year growth in 2007 would be most pronounced in the United States, although the economy should gather momentum in the course of the year and into 2008 as the drag from the housing sector moderates.”

With hindsight, a little overly optimistic, you may agree, which is unusual for economists, who, it has often been claimed, have correctly predicted nine out of the last five recessions.  

But, to be fair, economists are not magicians.  They have no crystal ball.  What they do have is historic and current information – what else is there? – on which to base their educated judgements about what the future holds, and sophisticated tools to help make those judgements.  

Atradius' own economists, for instance, have developed a system that measures political risk across the globe, and which has proved valuable to its customers, who rely on Atradius to inform their export sales strategies. The system, entitled ‘Sovereign Transfer and Arbitrary Risk' or STAR for short, combines reliable external statistics and ratings with Atradius' own underwriters' and economists' assessments to provide a summary measure of political risk in different countries. STAR has mapped in detail the remarkable economic events of recent years, unsurprisingly with many countries downgraded on the risk scale, mostly in 2008 and 2009. Many of those falls from grace have been precipitous: in the case of Iceland, from the top of the scale, indicating that the subject nation has the reliable governmental and legal structures that engender confidence when entering into international sales contracts, to the bottom, where extreme political and economic conditions make successful conclusion of an international transaction a real challenge.

Overall, 56 percent of countries have a positive STAR rating (very good, good or adequate) compared to 44 percent registering as either impaired, prohibitive or, like Iceland, extreme.  But the outlook for 2010, especially for the world's emerging markets, does look more optimistic, thanks to a resumption of capital flows, aggressive fiscal and monetary support, a recovery in commodity prices and an increase in trade.  

These percentages begin to have real value to the exporter and investor when viewed in the context of individual continents, each of which exhibits quite different overall risk characteristics.

Africa, for example, is dominated by countries in the lower, negative, end of the scale, with three countries – Zimbabwe, Liberia and the Ivory Coast – deemed an extreme risk. That said, if commodity prices continue their current recovery, and if financial conditions continue to ease, Africa does present opportunities for international investors and exporters.

Latin America, on the other hand, has a small majority of countries on the positive end of the scale, despite continuing issues over currency and conflict risks in some of its constituent nations. Overall prospects for 2010 are good, with Brazil expected to lead the way, while weaker economies such as Venezuela and Argentina continue to wrestle with internal problems.

Similarly, Asia (including the Middle East) as a whole tends towards the positive, but within that there is a huge diversity of risk: from ‘very good' for Japan, UAE, Qatar, and Kuwait,  to ‘adequate' for, among others, India, and ‘extreme' for Iran, Iraq, Afghanistan and North Korea.

The emerging markets of Eastern Europe and the Commonwealth of Independent States took a real battering as a result of the credit crisis, reversing the strong economic performance of the preceding years. While Poland, the Czech Republic and Slovakia fared well, and Romania, Hungary, Bulgaria and Croatia adequately, the general picture is a poor one, with 19 of the 28 constituent countries suffering negative GDP growth.  The outlook? It's likely that continuing financial sector problems, over-valued currency systems and unbalanced economic structures will weigh down recovery prospects.

Economists may not always be 100 percent right – and it would be unfair to expect them to be. But, when their forecasts are supported by tools like STAR, there's a much better than even chance that their forecasts will be accurate.

The author, Simon Groves, is a senior manager of corporate communications at Atradius Credit Insurance NV

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