Monday 06/04/2020

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What is the value of sustainability in emerging economies? (II)

Responsible Investment Strategist

The evolution of specific countries in the past three years is also interesting against the backdrop of investments. Let’s take the example of Mexico, an important position in emerging debt indices, or Argentina, which has recently made a comeback on international capital markets and has been very successful.




Although the universe and the methodology have evolved in the past three years, Mexico has been relegated by several places in the ranking. To be sure, it has made some progress, but this is not sufficient compared to its peers, and is also accompanied by deteriorations in specific domains.

The challenges Mexico is facing are well known, and it is with regard to transparency and democratic values and the population that the country must make substantial efforts. Corruption is a major issue in the country, and Mexico’s position continues to weaken in that domain. It now holds the 60th position in our ranking of 87 countries today. Violence and organised crime have a very sizeable impact on the peace situation in the country, leading to a position at the bottom of the ranking. Moreover, this violence has a cost: according to the NGO Vision of Humanity, the cost in 2015 amounted to over 2.12 trillion Mexican pesos, or 13% of GDP!

This corruption and violence are also seen in connection to press freedom. On this aspect, the country occupies the 76th place in the ranking. The quality of its government institutions, which according to academic research is a parameter to assess a country’s ability to repay its debt, is also very weak (75th position). This very low score in terms of transparency runs parallel to a weak score with regard to the population and its well-being. Inequality is very high, healthcare is weak and the fertility rate is below the average for the universe. Unfortunately, investments in education do not ensure that future generations will do better. Investments in primary education and commitments to this also remain below the average of the universe.

When looking into the environmental sustainability of the country, despite the progress that has been made carbon emissions are too high and sea and land preservation is sub-par. Hence, this analysis leads to a relegation of the second largest country of the region, from the 25th to the 37th position in the ranking. In other words, the gap with Brazil has further increased. It should be noted that Mexico remains an important constituent of representative fixed income indices.

Argentina, which remains a historic example of a country defaulting on its sovereign bonds, has made a comeback on international capital markets recently, issuing bonds with a maturity of 3, 5, 10 and 30 years. The bond emission, which was accompanied by a credit rating increase by the three major credit agencies, has been very successful, raising USD 15 billion.

At the end of March, the Argentine senate finalised the implementation of an agreement obtained at the end of February between the government and holders of Argentine debt. The latter faced an unfortunately well-known default in 2001, refusing a 70% haircut during the negotiations of 2005 and 2010. It was necessary to finalise this agreement in order to restore Argentina’s access to international capital markets after fifteen years of absence

The various measures are welcomed by investors and credit agencies, as they suggest the country’s solvency and liquidity are improving. However, the sustainability analysis and the country’s evolution over the past three years have not restored the confidence that is needed to invest in Argentine debt again. Indeed, the country’s sustainability does not seem to be improving. Quite the contrary, actually, as the country has been relegated by 17 places in the ranking in the past three years. With regard to economic sustainability, the country is at the bottom of the ranking, way below Chile. Apart from the score on its current account deficit, the country’s economic performance is well below the analysed universe. The lack of economic competitiveness is detrimental to transparency and democratic values. As a matter of fact, the deep institutional crisis is primarily the result of inefficient governance, corruption and weak ethics, and hence of a repressive economic regime. The country’s position is deteriorating with regard to corruption, but also in terms of political rights and civil liberties. Inequality among the population is also high. Healthcare and the fertility rate are moreover below the average for the universe. In addition, life expectancy is falling, with a score that is way below that of Chile, for example.

In terms of education, there is some hope. Although investments in education remain low, the literacy rate is high, much better than Chile’s, and the number of children having received primary education is relatively high and again higher than Chile’s.