Nepal: Risk Assessment


Country Risk Rating

D A high-risk political and economic situation and an often very difficult business environment can have a very significant impact on corporate payment behavior. Corporate default probability is very high.

Business Climate Rating

D The business environment is very difficult. Corporate financial information is rarely available and when available usually unreliable. The legal system makes debt collection very unpredictable. The institutional framework has very serious weaknesses. Intercompany transactions can thus be very difficult to manage in the highly risky environments rated D.

Strengths

  • Private transfers sustaining household consumption, the main driver of growth
  • Strong services sector, particularly tourism
  • Financial and technical support from India and China
  • International solidarity

Weaknesses

  • Heavily dependent on the agricultural sector and vulnerable to climatic vagaries
  • Isolation and difficulties of access to many of the country’s regions
  • Economy strongly affected by the earthquakes of April and May 2015
  • Weak productivity of the secondary sector
  • Poor infrastructure, recurrent shortages of electricity and fuel
  • Absence of a political consensus, leading to fear of worsening social and political tensions

Current Trends

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The economy is expected to recover gradually

In 2015, the powerful earthquakes that struck between 15 April and 12 May affected the economy. Growth was at a standstill during the 2014-2015 fiscal year. In 2015-2016, activity is expected to pick up but will remain constrained. The Nepalese economy is poorly diversified and is still highly dependent on agriculture, which employs 70% of the population and represents a third of GDP. But agricultural production is likely to remain limited, with crops affected by the earthquakes and a late start to the monsoon. As a result, maize and rice paddy harvests are expected to be hit. In addition, the industrial sector, which represents about 14% of GDP, is likely to be hampered by the destruction of the means of production and deteriorating infrastructures. Furthermore, the country suffers from shortages: supplies of fuel and materials from India have been suspended due to the demonstrations organized by ethnic groups in the south of the country. If this situation were to persist, the economic recovery could be at risk. Nevertheless, the tourism sector is expected to recover gradually, although it will continue to be penalized by the earthquake damage. Construction is, moreover, expected to benefit from projects linked to reconstruction. However, budget implementation in Nepal is difficult and the establishment of the National Reconstruction Authority has been delayed. Moreover, inadequate infrastructure, already deficient before the disaster, is hampering the reconstruction effort and the economic recovery. Investment projects already under way, in particular those associated with the exploitation of the country's hydroelectric potential have been postponed. Finally, private consumption, the country's main economic driver, should continue to benefit from substantial expatriate remittances (30% of GDP in 2014). With regard to prices, inflation is expected to rise with higher transport costs and poor harvests fueling inflationary tensions.

Worsening current account balance and public deficit mitigated by international aid

For the second consecutive year, the government has succeeded in presenting the 2015-2016 budget to Parliament before the start of the tax year. This budget, significantly higher (+32.6 %), prioritizes the sectors affected by the earthquakes. The budget balance, under the combined effects of lower tax revenues and higher spending, is expected to go into deficit. Public debt should, however, remain low, although the ability of the Nepalese government to revive the economy seems problematic. This is because the country suffers from a low budget execution rate. Only 80% of budgeted capital spending was carried out during the 2013-2014 financial year.

With regard to the external accounts, the country runs a significant trade deficit with high imports of many products. Despite large remittances by expatriate workers, the fall in tourism revenues and the rise in imports are expected to adversely affect the current account, if aid is excluded. Nonetheless, Nepal receives substantial amounts of financial aid, in particular from China and India. The country also benefits from the support of international financial institutions.

The country is expected to return to political stability, thanks to the adoption of a new constitution

Political instability has been prevalent since the end of the civil war in 2006 and the first national elections of 2008 which followed the abolition of the monarchy. The situation between the two main political parties is tense and successive governing coalitions have been unable to draft a constitution. After the dissolution of the government in May 2012, an interim government was formed only in March 2013. The November 2013 elections enabled a return to relative political stability. The Assembly, elected in November 2013, was tasked with drafting the new constitution. The commission appointed to draft it ran into delays but the earthquakes that struck in spring 2015 and popular discontent pushed the various political leaders into making an effort at national unity. The Constituent Assembly adopted a draft constitution on 16 September with 507 votes "for" out of a total of 601 MPs. The President ratified the text on 20 September with immediate application. Nonetheless, the negotiations over the constitution were conducted in a climate of violence and several minorities still denounce the division of certain provinces and are protesting in the south of the country. A special federal commission might review the new boundaries. In late October 2015, the Parliament elected Bidhya Bhandan (Communist Party) as the country's President and Khadga Prasad Sharma Oli (Communist Party) was appointed as Prime Minister. However, the new leadership team will have to govern by forming alliances with the many parties represented in Parliament.

The country's political equilibrium remains fragile and the risk of renewed political instability and violence cannot be ruled out, as social and ethnic tensions remain acute.

Source:

Coface (09/2016)
VERY LOW RISK............ACCEPTABLE RISK............ VERY HIGH RISK


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