November 5th, 2014
by Elliott Morss, Morss Global Finance
In the summer of 2013, I argued that the Middle East, India/Pakistan, and the Eurozone were the most dangerous regions in the world. In the interceding 15 months, very little has happened to change that judgment. So I decided to complement that article with one on the safest countries in the world. I start with a quick update on the most dangerous regions.
a. Middle East
I believe that most of what is happening in the Middle East can be explained as a fight between religious sects As Table 1 indicates, the Sunnis have greater military and economic strength than the Shiites. And they had even more before they US toppled Saddam Hussein. However, things are becoming more complex. For example, although most Turkish Muslims are Sunni, the Turkish government refuses to allow the US and other nations fighting ISIS to use its airports to launch strikes against the terrorists because it fears this would strengthen the Kurds. But more importantly, the rebel groups are fractionating and will increasingly work as mercenaries for the highest bidder. That means even if the US puts "troops on the ground" in Syria, there are no reliable partners to work with there.
Table 1. - Middle East Countries by Sect and Oil Reserves
* While Lebanon is mixed, Hezbollah is in the Shiite camp so it is included along with other Shiite countries.
Sources: Wikipedia, World Bank and Pew Forum
Another example of things getting more complex: it is reported that ISIS is selling $1 million of oil daily to the government of Syria. Where did ISIS get the oil and how could it have become so powerful so quickly? One hypothesis makes sense: the US getting rid of Saddam Hussein effectively gave Iraq and its oilfields to Iran. This worried Saudi and other major Sunni countries, so they created ISIS.
One thing the table makes quite clear: there could be an oil spike soon. With chaos in the Middle East, it would not be surprising for some happening to reduce its oil production/exports. And knowing that Venezuela, Libya, and Nigeria are also large oil producers is hardly reassuring.
I judge the Eurozone region as more dangerous than I did in 2013.
b. The Eurozone
Earlier this year, there were glimmers of hope coming out of the Eurozone. Borrowing costs for some of the "weaker" countries had fallen, and there were actual signs of growth. Table 2 provides a quick reality check on the region. Regional growth is anemic, and projections for 2015-16 - who knows?
Table 2. - GDP Growth, by Region
Source: IMF World Economic Outlook
Table 3 provides FocusEconomics data on the Eurozone's weaker countries (the government deficit and debt data are percentages of GDP). FocusEconomics polls banks and other finance organizations for its data and it usually more accurate and timely than those of governments and the IMF. But even so, the projections do not allow for possible "discontinuities".
Table 3. - Economic Data on Weak Eurozone Countries
Source: FocusEconomics Consensus
For example, the high unemployment rates of Greece and Spain and growing unemployment in Cyprus are political time bombs. And while country bond rates fell for a while earlier this year, the government debts of Greece, Italy, and Portugal, they will shoot up when massive European Central Bank purchases end. They are not sustainable. Another major Greek default will be required.
And beyond the problems evident in the data, political fissures are growing. France has just announced it will exceed the Eurozone requirement that government deficits be no more than 3% for the second year in a row. This grates on Eurozone "austerity" members, particularly Germany.
I judge this region just as dangerous as I did in 2013.
The population of India will pass China's soon and continue to grow. Unlike China, it has not made the infrastructure investments needed to accommodate such a large and growing population. There is corruption in all countries, but the corruption in India is particularly problematic - special interests block needed economic reforms.
Many do not realize that India has serious water problems that involve Pakistan. Jim Thebaut, a water and environmental expert has said:
"Despite the Indus Water Treaty, things could get out of hand - so here we have two large countries, both with nuclear weapons."
I judge this region not quite as dangerous as I did in 2013. The newly elected Prime Minister Modi offers a ray of hope for better governance.
The Safest Countries?
I started to address this question by looking through the IMF's projected GDP growth rates for 189 countries. I narrowed that list down to 9 countries for further consideration:
- Australia and Canada - safe resource-rich countries;
- Three Asian countries - China, Philippines and Vietnam - high GDP growth rates;
- Singapore and Switzerland - amazing fiscal prudence; and
- The United States.
Table 4 provides economic data on these countries ranked by projected economic growth rates.
We hear that economic growth is slowing in China. But GDP is still growing at over 7% and China is a country of more than one billion people! Unemployment in all these countries is reasonable and declining. Singapore, the Philippines and Switzerland are running large government surpluses. The government debts of Singapore and the US are manageable as evidenced by their borrowing rates. And all four Asian countries are running huge current account surpluses.
Table 4. - Economic Data on Selected Countries
Source: IMF WEO Data
China worries me. While it has performed extremely well to date, it is a resource poor country in the process of making a transition from export-led growth to consumption-led growth. It will be interesting to see what consumption-led growth does to its international trade balance. And protests are increasing (minority and environmental groups, students in Hong Kong).
So let's take the remaining 8 countries and see how their stock markets have performed. I do this in Table 5 using the performance of ETFs as country proxies.
Table 5. - Stock Market Performance
Source: Yahoo Finance
Putting the data in Tables 4 and 5 together, I eliminate Switzerland and Canada (slow growth), and Australia (poor stock market performance). Consider next the remaining countries: the Philippines, Singapore Vietnam and the US.
a. The Philippines
For many years, the Philippines flew under radar. And yes, it still has guerillas/terrorists and violent storms. But government is moving country in right direction - the country has solid economic numbers with little debt. Overall, its stock market has a high price earnings ratio. But keep in mind, GDP is expected to grow by more than 7%. In January, I wrote a piece on the country with a Philippine colleague, Renzie Doem Agutaya. We concluded that investments in the cement and electricity industries would pay off. I currently own Philippine Long Distance Telephone Company (PHI) and it has performed well.
I believe that Singapore is the best governed country in the world. With several large minority groups that have caused "unrest" elsewhere, the government rules with a firm hand. The private sector is unusual: it consists of a partnership between very well-paid government officials and private businessmen. The government debt of 101% of GDP is high but is primarily an indication of how easy it is for the government to borrow money. Its government surplus and huge current account surplus are reassuring.
I spent considerable time travelling between China and Vietnam in the late '90s. I concluded that the Chinese worked hard, but the Vietnamese people work harder than the citizens of any nation. And they have great resiliency - they have been invaded by China 11 times and once by the United States. They have always recovered quickly. The country's only weakness is the government's tendency to over-manage the economy. But this problem is not as serious as it once was. The country's economy is growing rapidly but it still has a troublingly large government deficit. Investors are starting to realize the country's potential. But its stock market still has a low average price/earnings ratio.
d. The United States
The economic shortcomings of the US are well known - a slow and uncertain recovery, stasis in Washington because the political parties cannot work together, the increasing power of lobbyists, and expensive education and health systems that are not producing good students or health. And its economic numbers are not impressive: only moderate growth with large government deficits and growing debt.
So why is it on my list and why have its stock markets performed so well? The answer is simple: the world views it as the safest country in the world for investments. And whenever some new economic crisis causes global panic, people buy Treasuries and US dollars. So how important are these purchases, these capital inflows? To provide some perspective, consider that the US international trade deficit on goods and services was just over $700 billion before the 2008 global collapse and is now running around $400 billion (helped by declining oil imports). Net capital inflows have exceeded US trade deficits in 2007, 2011, and 2013. So what does the future hold? With the ending of quantitative easing, US interest rates will start to rise and this will bring huge inflows to purchase US Treasuries.
But what about the US recovery, will it continue? Table 6 provides a number of indicators on the country's economic recovery. What do they tell us? Steady albeit unspectacular improvement. I see a positive momentum that Fed. Chairman Yellen wants to continue.
Table 6. - US Economic Indicators
* ISM over 50 = growth
Source: U.S. Treasury, US Economic Statistics, Monthly Report, Oct. 2014
Technological change has completely changed the competitive landscape in the last two decades. While there was once a time when low-cost labor determined competitiveness, it no longer does. Labor costs are not nearly as important as they used to be: the labor cost share in manufacturing has fallen from 55.8% in 1947 to only 27% in 2011. That means that now and in the future, cost considerations other than labor will determine a country's competitiveness.
The US is the world's leader in innovation because no other country has as much "cash on hand" to commercialize new ideas. Most of the leading US researchers in health and other fields are on retainers from firms to have first refusal on new ideas. No other country has anything close to this.
So the US is very competitive internationally. Where will the new global markets be? Ultimately, the demand for goods and services depends upon people. Between 2015 and 2013, the UN estimates that the population in high consumption segment (ages 20 - 64) of developed countries will fall by almost 2%. In contrast, the population in this same segment in the developing world will grow by almost 7% (227 million). People per se do not buy: they must have purchasing power. So consider what will happen to purchasing power for these two country groupings. Meaningful gross domestic product (GDP) estimates can only be made for more than a few years out. Between 2014 and 2018, the International Monetary Fund estimates that the GDPs of developed countries will increase at an annual rate of 2.4%. The GDP of developing countries is estimated to grow more than twice as rapidly - 5.4%. Put the population growth together with purchasing power growth: it suggests that if globalization is allowed to proceed and trade barriers are allowed to fall, there will be a huge and growing demand for goods and services in developing countries.
Is the US in a position to compete in these markets? A good indicator of a country's competitiveness is how much foreigners are investing in it. Back in 2003, China's foreign direct investment (FDI) exceeded that into the US. No longer. UNCTAD reports that for the last three years for which data are available, there was more FDI in the US than any other nation - $197 billion. For the same period, China's FDI was $120 billion.
For reasons stated above, I like the prospects for the Philippines, Singapore, Vietnam, and the US.
 The government balance, debt and current account figures are expressed as a percent of GDP.