Asia Country Risk Ratings
We review country risk ratings for 11 countries in Asia.
Afghanistan
Afghanistan has a very-high overall risk. The Islamic Emirate of Afghanistan (ruling political entity) is under the leadership of the Taliban, a predominantly Pashtun, and Islamic fundamentalist political movement. The presence of ethnic fragmentation, Islamic terrorist movement and human-rights issues make political violence a very high risk. Human rights abuses have been alleged to be present in Afghanistan’s interim government. Underinvestment and lack of working opportunities are big issues for Afghanistan, with the Taliban’s move to ban Afghan women from working for non-government organisations representing problems. Upon the Taliban’s takeover in 2021, many streams of foreign aid have been frozen and as a result, 90% of its population lives below the poverty line. The freeze of billions of dollars of assets had been offered to Afghanistan upon the honouring of promises related to security, governance, and human rights. Sovereign non-payment and inability of the government to provide fiscal stimulus are medium-high and medium risks respectively, due to this lack of access to key assets which would otherwise facilitate sovereign payments and economic investment. Supply chain disruption is a risk relating to a country’s flows of goods and/or services within its supply chain being disrupted by political, economic, or environmental stability. Afghanistan has a very high risk of supply chain disruption, due to fragile/damaged international relationships, vulnerability to climate conditions (such as the March earthquakes in March over Afghanistan and Pakistan), being landlocked, having its borders 50% mountainous and poor infrastructure. Its neighbours, Uzbekistan and Turkmenistan, are keen to introduce improved infrastructure systems for railway, gas, and power transportation. Legal and regulatory risk is a very high risk in Afghanistan. Weak governance has meant many functions are affected by corruption, restrictive regulations (as seen in the 2019 presidential election and other areas of increasing authoritarianism), and weak rule of law. Weakness in working modern economic and administrative regimes has also caused issues. Banking sector vulnerability is a medium risk, but risks going higher with 57% of loans not performing in 2020 according to the UN.
China
China’s overall political risk rating remains medium. The risk of political violence remains medium-high, as the risk remains that either China authorities make a mistake with military exercises around Taiwan that led to escalation or president Xi surprises and take a high risk decision to confront Taiwan. The late 2022 protests over COVID restrictions will also be a concern for the authorities.The U.S. and China want relations to improve but this is to avoid misunderstandings between the two powers rather than a major change of relationships.The cross party view in Washington remains that the U.S. and China are in strategic competition and this requires U.S. measures to control China. Meanwhile, economic growth has bounced after the switch to an endemic COVID policy but peak quarterly growth has already been seen in Q1.Into 2024, growth will likely slow to below 5%, both due to the ongoing hangover in the residential property sector and due to the headwinds from the high levels of debt across the economy.Though official measures of government debt is not high, the rating for the inability of government to provide stimulus remains at medium.Official government debt figures omit huge local government financing vehicles (LGFVs) debt and fiscal policy will likely swing from modestly expansionary to contractionary in 2024.The combination of excess debt for LGFVs, plus the overhang of property developer’s debt, also means that banking sector vulnerability remains at medium.Small rural and commercial banks remain most at risk from a pick-up in non-performing loans weakening equity capital and causing problems.However, China’s authorities remain proactive and want to avoid any major banking sector problems and crisis management will likely be quick.
Hong Kong
Hong Kong has an overall risk increase from low to medium-low. Hong Kong has activated a new electoral system and improved its legal system. Government policy from the Government of Hong Kong (HKSAR Government) places importance on the housing supply, with these new initiatives retaining its medium-low risk of political violence. However, rare protests have spawned in Hong Kong in reaction to China introducing restrictions that affect Hong Kong citizens. The measure of voice has also suffered because of the Hong Kong government, taking down protesting billboard artwork and removing the protest anthem related to the protests on Spotify. Political interference is a risk area relating to the risk of host government intervention in the economy or other policy areas that negatively affect overseas business interests. Political interference is medium-low in Hong Kong, with risks coming from the shrinking potential of reform, silencing protests, and pandemic-related restrictions damaging international attractiveness. With strong links to China and a stable electoral and legal system, political interference has also remained stable. Sovereign non-payment has worsened to medium risk, despite a shrinking budget deficit, large foreign-exchange reserve, fiscal reserves and promise of maintain a fiscal surplus. Debt has increased to 47.6% of GDP in 2022, but remains manageable. The inability of the government to provide stimulus has also worsened, this time to a medium-low risk, due to the restriction of funds due to the objective of a fiscal surplus. GDP is also vulnerable/dependent on the economic success of China on a trade and finance basis, restricting the ability of the Hong Kong government to be effective in stimulating the economy. An end to the Hong Kong Dollar’s pegging to the US Dollar remains unlikely in the next year. High foreign-exchange reserves and current-account surplus, also support the maintenance of Hong Kong’s medium-low exchange transfer risk. The banking sector has a medium-high risk, owing to its exposure to the success of China. Banking-related confidence surveys have indicated a strong banking system, especially in areas of deposits and following regulations. Legal and regulatory risk is a low risk, possessing high-quality infrastructure, a strong link to China, ample finance to solve supply chain issues, and open economy status. Lack of innovation and diversification, along with its mismatched position to the business cycles in the US and China, can produce supply chain lags and a loss of competitive advantage.
India
India overall risk rating remains medium.Given India’s strong macroeconomic fundamentals and continued recovery, the social and political conditions in the country remain stable. The government has a tight control over the security situation and enjoys a huge majority in parliament. The prime minister, Narendra Modi’s popularity has also not waned in his two terms in parliament. It appears that he is on track to secure a third victory in May 2024. As a consequence, while social stability is ensured, political volatility is likely in the run up to the national elections.
On the political front, there is no single opposition party that can provide formidable opposition to the ruling Bhartiya Janta Party. However, the opposition parties have come together to form an alliance ahead of the elections. This too is unlikely to dent the BJP’s chances in the elections significantly. While overall communal clashes have reduced significantly in India, pre-electoral violence is often seen in some states such as West Bengal and Jammu Kashmir. This is likely to persist over the coming quarters as India gears up for elections. Meanwhile, the threat of terrorist attacks by extremist organizations in Kashmir will remain elevated, necessitating a strong security presence in the region. The restoration of statehood for Jammu and Kashmir, suspended in 2019, is scheduled for the second half of 2023, along with fresh local elections. This could keep the situation tense in the state. There is growing concern in the north-east state of Manipur, which has been witnessing episodes of inter-community clashes in recent months. These clashes have turned violent and the government has been forced to impose curfews and deploy the armed forces in the region. However, this remains limited to the state and is unlikely to spill over into any other region. The inter-community violence is centered on demands for representation, which the government is looking to address. In the lead-up to the general election, the BJP will intensify its Hindu nationalist agenda in 2023, as demonstrated by its decision to discontinue the reservation policy for Muslims prior to the state assembly elections in Karnataka in May. While this trend may spark occasional religious and communal clashes in certain areas, it is unlikely to result in widespread social unrest.
On the geopolitical front, occasional skirmishes along India’s border with Pakistan and China will persist. These are latent conflicts and are unlikely to turn into an open war. Pakistan is not in the position to go to war with India, while China is likely to make claims on Indian territory, it will not risk an open conflict at this time. Overall, India continues to present a bright picture on the political and social stability front.
Indonesia
Indonesia overall risk rating remains medium.The low level political instability that Indonesia witnessed in September 2022, following the 30% fuel price hike has since diminished. Indonesia’s political sphere is charging up though as it heads to elections in early 2024. Although, Indonesia has seen a general rise in protests in recent months, the country remains fairly stable. The protests have been mostly politically led or owing to changes to certain laws. For instance, the parliament passed sweeping changes to healthcare laws to attract foreign talent in the sector, which led to protests by medical workers in the national capital. More recently, Muslim groups across the country gathered to protest the burning of the Holy Quran in Stockholm. The primary causes for protests though have been either changes to laws, which could put the workforce at a disadvantage, increasing cost pressures and some opposition led protests. The protests remain non-violent and security concerns are limited. We expect sporadic protests over 2023 on the fronts should prices surge again (owing to any external shock) and owing to electoral volatility.
On the election front, Indonesia’s picture remains quite fluid. The upcoming 2024 presidential election in Indonesia has prompted president, Joko Widodo (Jokowi) to broker a grand coalition. The coalition includes five political parties, and Jokowi's main goals appear to be to leverage his popularity to help his preferred candidate, preserve his legacy and avoid a three-way race that could split votes in favor of the opposition coalition. Jokowi's popularity remains high, with approval ratings exceeding 75%, making his support for a presidential candidate a significant factor in shaping voter choices. It appears that the Central Java governor, Ganjar Pranowo is his favored candidate and the ruling Indonesian Democratic Party-Struggle (PDI‑P)’s weight is behind him. Therefore, the two leading candidates in the presidential race are Gerindra leader Prabowo Subianto and Ganjar Pranowo. In terms of political parties, the PDI-P remained the most popular with 15.2% support, closely followed by Gerindra with 14.7%. Jokowi's efforts to broker a grand coalition are likely to get some support for Pranowo. Our expectation is that Pranowo is likely to succeed in the up-coming election given support from the PDI-P and other smaller parties in the coalition. President Jowoki’s popularity is also likely to lend support to him. But with several coalitions being formed and parties forming alliances, the situation remains dynamic.
Macau
Macau remains at medium-low risk. Macau’s tourism sector offers a lot of its income, with its long history of being a gambling centre bringing in a lot of revenue. Ho Iat-Seng has been the chief executive of Macau since August 2019, acting as the third chief executive since its Chinese rule beginning in 1999. In the current political set-up, ordinary citizens have no say on who becomes chief executive. For numerous periods since 2019, COVID-19 lockdowns have rendered gambling illegal. Significantly, a gambling kingpin, Alvin Chau, has been presented with an 18-year prison sentence for facilitating illegal bets during this period. In 2022, this closure of one of Macau’s major industries greatly supported the 26.8% fall in GDP. Given a large portion of the gambling venues' clientele comes from Hong Kong and China, revenues have recovered quickly in the periods that it is legal, making the government’s inability to provide stimulus only a medium-low risk. A very possible tightening of the local political scene has been predicted to inflame tensions between Macau and the West, representing the minimal cause for concern within its low risk of political violence. This risk is related to the violent possibilities relating to strikes, riots, civil commotions, sabotage, terrorism, malicious damage, war, civil war, rebellion, revolution, insurrection, a hostile act of belligerent power, mutiny or a coup d’état. Local interest rates also continue to rise as lockdown restrictions lift, in line with the US and Hong Kong, representing a threat to Macau’s credit health and to its medium-low exchange transfer risk. Along with Hong Kong, Macau remains to possess a media environment filled with administrative attacks on free speech and forced self-censorship, one key issue of Macau’s medium-low legal and regulatory risk.
North Korea
North Korea remains a very high-risk country. In a bid to pronounce its nuclear power status, nuclear weapons testing has been carried out in 2023. Though international warfare is unlikely to come directly from this nuclear testing, political violence is made a very-high risk due to concerns that tension could spiral from nuclear testing. The US had made a deal with South Korea in April, for the US to use South Korean waters and to combine resources in the effort to deter North Korea from becoming violent. Kim Yo-Jong, Leader Kim Jong Un’s sister, has warned that this US-South Korea deal will spell “more serious danger”, indicating that US nuclear-armed submarines moving into South Korean waters may not have its intended effects in deterrence. Legal and regulatory risk is the risk of financial or reputational loss because of difficulties in complying with a host country’s laws, regulations, or codes. Legal and regulatory risk is a very high risk, due to the high output of propaganda to state-owned press and broadcasters in North Korea, restricting measures of voice in its population. Ordinary North Koreans can be put into forced labour for accessing foreign broadcasts and foreign-based radio stations are jammed by the government. Trade flows between China and North Korea have started to recover from COVID-19 risks, looking to offer North Korea some economic recovery, making the inability of the government to provide stimulus a medium-high risk. It also has great potential in its mining resources, leaving an opportunity for economic growth through widely untapped collections of coal, iron, copper, and more. Supply chain disruption remains a high risk, due to potential damages from warfare, inadequate investment in non-military initiatives, energy shortages, political and economic isolation, and lack of infrastructure. The potential gains from its mining resources, talks with the US and South Korea, and its borders with China and Russia could help support its supply chain. The risk of doing business is also very high, due to productive sectors being ignored by investment in favour of military spending, lack of energy, and economic isolation, despite opportunities coming from its youthful population and mining resources. With the restrictions on travel and measures of voice, other risks also mount on business entities.
Pakistan
Indonesia overall risk rating remains high.Pakistan's political landscape is in a state of turmoil as the country gears up for its upcoming general election, which is scheduled for October 2023. Given extreme political polarization and a lack of unity among institutions, the prospects for a free and fair electoral process appear grim. For now, the current ruling coalition Pakistan Democratic Movement (PDM), which includes the Pakistan Muslim League (PML-N), the Pakistan People's Party (PPP) and a number of smaller parties, will manage to maintain political hegemony with support from the military. Nonetheless, their parliamentary majority will remain modest, thereby contributing to the fragility of political stability in the nation.
Outside of the electoral volatility too, Pakistan’s social stability is fragile. The risk of widespread social unrest and protests is heightened given the deteriorating living conditions characterized by soaring inflation and high unemployment rates. While the IMF resumed its financial assistance to Pakistan earlier in July, this support is unlikely to change the situation on the ground substantially. Consequently, the risk of social unrest in the near term remains high. Further, fresh aid provided by the IMF to prevent a debt default comes with stricter fiscal reforms, which, in turn, may further aggravate social unrest within the country. Tougher reforms by the ruling coalition have resulted in eroding the limited popularity enjoyed by the government, and this situation exacerbated by persistent inflation and shortages of essential commodities, suggests that law and order will remain precarious. Pakistan will continue to grapple with sporadic episodes of political instability and mass protests, primarily due to its dire economic circumstances.
In addition to the above, Pakistan's social stability faces additional security threats from Islamist groups such as the Tehrik-i-Taliban Pakistan (also known as the Pakistani Taliban) and a separatist movement in Balochistan. The year 2023 witnessed a surge in terrorist attacks, and this trend is expected to intensify leading up to the election. Heightened incidents of attacks targeting non-nationals and demonstrations centered on religious issues are likely to persist.
Papua New Guinea
Papua New Guinea remains at a medium-high overall risk. Following James Marape’s re-election in July 2022 votes of no-confidence cannot occur until February 2024, making it easier for the coalition government to make policy. The general election had caused violence, demonstrating the medium-high risk of political violence in Papua New Guinea. Despite its poor economic regulation, Papua New Guinea’s large current-account surplus and promising commodity sector look to drive growth over this year. The inability of the government to provide stimulus has also improved, with risk falling to a medium level. This risk relates to the government’s inability to stimulate the economy due to a lack of fiscal credibility, declining reserves, high debt burden or government inefficiency. Stimulation has occurred however, such as new gas fields being developed, liquefied gas production units being manufactured, and new mines opening. With abundant opportunities in the sectors of ores, hydrocarbons, agricultural products, wood and seafood products, there is no shortage of areas to invest in. Supply chain disruption is a medium-high risk, due to its weak infrastructure network and high exposure to natural and climatic disasters. Banking sector vulnerability remains a medium-low risk, due to foreign-exchange risks and the government’s proposal to increase taxation on the banking sector. The sector's exposure to state-owned enterprises is also a risky position, as these enterprises are effectively insolvent and indebted. Sovereign non-payment is a medium-high risk, due to IMF support, successful major resource projects, and beneficial global commodity price increases. Exchange transfer remains a medium-high risk, due to the crawling peg to the US Dollar overvaluing the Papua New Guinean Kina. Exchange-rate volatility can be expected in the short-term, due to the IMF’s encouragement of market-driven monetary policy. Legal & regulatory risks and the risk of doing business remain high, with deep-rooted issues of corruption, red tape delaying projects and ambiguous land laws.
Singapore
Singapore overall risk rating remains low. Singapore’s political sphere continued to maintain stability over H1 2023 and is likely to retain status quo over the medium term. With the People's Action Party (PAP) at the helm of technocratic governance little change is likely in Singapore’s social and political landscape. The PAP, enjoying a parliamentary supermajority, has been the dominant force in Singaporean politics for decades. However, the party's dominance was slightly diluted in the 2020 election when the opposition Workers' Party (WP) increased its share of the vote. This has led to some delay within the party’s transition from PAP's "third-generation" leadership, led by Prime Minister Lee Hsien Loong, to the "fourth-generation" (4G) leadership, currently headed by Lawrence Wong, the deputy prime minister and finance minister. It is expected that Lee will complete his full term, with a transfer of power occurring after the next general election in 2024.
Meanwhile, despite Singapore's ethnic diversity the risk from ethnic tensions remain low. There are no episodes of charged violence or disruption to economic activity. The government has taken steps to increase the political representation of ethnic minorities, such as Indians and Malays. Further, government’s strict laws on censorship and limitations on public demonstrations reduce the likelihood of major unrest stemming from racial tensions.
Recent events, including the resignations of parliamentary speaker, Tan Chuan‑Jin and another member of parliament, Cheng Li Hui from parliament and the PAP, along with other controversies involving senior PAP figures being involved in corruption have dented the party's popularity. However, this is unlikely to see an impact on the overall political dominance of the party. The ongoing cost of living crisis in the country will stoke some public discontent, which could diminish the PAP’s popularity but will not create any severe public backlash. Despite these challenges, political stability in Singapore is expected to endure. The next elections are only in 2024, and it is likely that the PAP will retain top spot in them, albeit with lower vote share and by-elections are not anticipated. The PAP has assigned other MPs to fulfil the responsibilities of Tan Chuan-Jin and Cheng Li Hui in their respective group representation constituencies. Previously, the general election was projected to occur in late 2024; however, it is now believed that it will be postponed until 2025 to allow time for these issues to settle.
Sri Lanka
Sri Lanka overall risk rating remains medium-high. Sri Lanka's political landscape continues to be marked by instability and is expected to remain so over 2023-24. The country's economic challenges, coupled with ongoing fiscal austerity measures brought on by the ongoing IMF financial package, have the potential to ignite further social unrest and demonstrations. Sri Lanka witnessed massive protests last year when dissatisfied citizens took to the streets and former president, Gotabaya Rajapaksa was forced to flee. While, the situation on the ground has improved considerably since June last year, dissatisfied citizens are likely to demand greater accountability from lawmakers and may call for early presidential and parliamentary elections, currently scheduled for 2024 and 2025 respectively. The risk of protests turning violent for an extended period exists, particularly if the promised economic recovery fails to materialize or if clashes between pro- and anti-government groups escalate due to inadequate security measures.
Sri Lanka has witnessed strikes and protests in H1 2023 with opposition parties banding together to demand local elections (which the government delayed citing lack of funds) and citizens protesting against austere fiscal measures (such as increased tax rates on personal income). As a consequence, Sri Lanka witnessed the imposition of curfews and other restrictions over the first half of 2023. The current government’s slim majority in parliament is another risk to political stability in the near term. However, it appears as though that president Ranil Wickremesinghe is determined to serve out his full term and consolidate his position. While the macroeconomic crisis is the biggest factor stoking social instability in Sri Lanka, the government’s stalling of local elections also poses a high risk. Protests against the decision to delay elections repeatedly led to several protests in the national capital in first and second quarter this year.
In summary, Sri Lanka's political situation remains unstable as the country grapples with economic challenges and social unrest. The potential for demonstrations, demands for accountability, and calls for early elections persist. Efforts to support economic recovery and negotiate with sovereign creditors may be hindered by ongoing instability, potentially prolonging strains on the country's public finances.