April 10, 2014
Aon has released its 2014 Political Risk Map, which identifies an increased risk rating for the emerging market BRICS countries. As a result, countries representing a large share of global output experienced a broad-based increase in political risk including political violence, government interference and sovereign non-payment risk.
According to Aon, political risks in Brazil have been increasing from moderate levels as economic weakness has increased the role of the government in the economy. This is of particular concern given this year’s World Cup and the 2016 Olympics.
Russia’s rating was downgraded largely due to recent developments with the Ukraine and the annexation of Crimea. Political strains and focus on geopolitical issues have exacerbated an already weak operating environment for business and exchange transfer risks have increased following the risk of new capital controls. Aon states that Russia’s economy continues to be dominated by the government, so economic policy deadlock has brought growth to a standstill and with it an increase in the risk of political violence.
India’s rating was downgraded with legal and regulatory risks elevated by ongoing corruption and moderately high levels of political interference. Territorial disputes, terrorism, and regional and ethnic conflicts also contribute to elevated risks of political violence.
China’s rating was downgraded to moderately high. This deterioration in political risk, including an increase in political violence, has occurred at a time of slowing economic growth, which suggests that the economic policy deadlock and economic sluggishness are mutually reinforcing.
Despite having strong political institutions, South Africa is struggling from recurrent strikes, which have become the major means of wage setting, and which weaken the outlook for business and raise financing costs, according to the Risk Map.
The map measures political risk in 163 countries and territories, in order to help companies assess and analyse their exposure to exchange transfer, legal and regulatory risk, political interference, political violence, sovereign non-payment and supply chain disruption, according to Aon.
Looking to other countries around the world, in early 2013, Aon identified some improvements in the Caucasus, Armenia and Azerbaijan, which have continued. The rest of the region has weakened. Russia’s rating was downgraded largely due to recent developments with the Ukraine. This volatility is also affecting other former Soviet states, including Armenia, Belarus, Georgia and Moldova.
Developments in 2013 have reinforced the relative strength of the richer oil exporting Middle East and North Africa (MENA) countries of the Gulf Cooperation Council (GCC). Compare this to their North African peers, all of whom have fewer financial resources with which to manage any shocks, they all continue to have higher risk scores across all elements of political risk tracked by Aon. The three countries upgraded in 2013’s risk map (Bahrain, Oman and UAE), maintained their more resilient and lower risk outlook, while Jordan, where Syrian refugees have exacerbated domestic shocks, was downgraded.
There have been some improvements in Sub-Saharan Africa, notably in Ghana and Uganda which offset deterioration in South Africa and Swaziland, which were both downgraded. Although Ghana has fiscal overspending and rising inflation, which is weakening its macroeconomic stability, increases in revenues and investment reinforced its already strong political institutions. Uganda continues to suffer from an overly centralized government and significant human rights issues, the stabilization of donor finance improved its ability and willingness to pay debts and reduced political interference.
Trends to watch for 2014, according to Aon:
2014 upgrades and downgrades in Country Ratings:
Upgrades (where the overall country or territory risk is rated lower than the previous year) : 6 upgrades (2013: 13 upgrades): Ghana, Haiti, Laos, Philippines, Suriname, Uganda
Downgrades (where the overall country or territory risk is rated higher than the previous year) : 16 downgrades (2013: 12 downgrades): Brazil, China, Eritrea, India, Jordan, Kiribati, Micronesia, Moldova, Russia, Samoa, South Africa, Swaziland, Tonga, Tuvalu, Ukraine and Vanuatu.
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This story was originally published by Canadian Insurance Top Broker.