Canadian Underwriter

Falling oil prices a top political risk in emerging markets: Aon risk map

March 4, 2015   by Canadian Underwriter

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Aon Risk Solutions’ 2015 Political Risk Map, which portrays risks in emerging markets, shows that the top political risk is the increasing instability in already-fragile oil-producing countries as a consequence of the low oil price.

Falling oil prices a major political risk, Aon says  “The falling price of oil will hit oil-producing countries, particularly those in the Middle East and North Africa that are outside the Gulf Cooperation Council (GCC),” notes an Aon Risk Solutions report detailing map findings. “A number of oil-producing states are exposed to oil shock and lack the resilience to cope with its potential impact on state institutions,” the report cautions.

The map is produced in partnership with independent, global research firm Roubini Global Economics, notes a statement issued Wednesday by Aon Risk Solutions, the global risk management business of Aon plc.

The map measures risk in 163 countries and territories to assess the risks associated with exchange transfer, sovereign non-payment, political interference, supply chain disruption, legal and regulatory regimes, political violence, ease of doing business, banking sector vulnerability, and governments’ capability to provide fiscal stimulus. Each country is rated as low, medium-low, medium, medium-high, high or very high overall and in each specific risk category.

Country risk rating changes in 2014: downgrades dominate upgrades - Source: Aon Risk Solutions - 2015 Political Risk Map, Aon's Guide to Political Risk in Emerging MarketsThe map upgrades and downgrades countries and territories based on events that have occurred in the previous year, Aon notes. As per the 2015 map, seven countries have been upgraded (where the overall country or territory risk is rated lower than the previous year) namely, Dominican Republic, Ecuador, Georgia, Lao PDR, Panama, Swaziland and Zimbabwe, while 12 countries have been downgraded (experiencing an increase in political risk) namely, Angola, Central African Republic, Burkina Faso, Ghana, Guinea Conakry, Haiti, Libya, Mozambique, Oman, Pakistan, Sierra Leone and Uganda.

In general, more than half of the upgrades involved countries in Latin America & the Caribbean, perhaps reflecting changes in policy and benefits from an improvement in global/United States growth, notes the report. However, most downgrades involved African countries, with fuel producers particularly exposed to exchange transfer and sovereign non-payment, it adds. 

Aon Risk Solutions’ 2015 Political Risk Map - click image to open zoomable PDF version“In 2014, smaller countries accounted for the majority of changes, which suggests that some of the smaller countries may now be experiencing some of the political risks experienced in larger countries in the previous year,” the report states. One possible explanation “is the fact that oil-producing countries experienced a generalized deterioration in their financing outlook,” it notes.

“The map illustrates that 2015 will be a particularly challenging year for oil producers in the Middle East and Africa, several of which already have high or very high country risk ratings,” notes the Aon statement. “The effectiveness of extremist groups in the Middle East & Africa will be amplified in afflicted countries that lack the resilience to absorb economic shocks,” the company reports. [see Interactive Risk Map]

Aon further reports the low oil price continues to cast an economic shadow over the CIS (Commonwealth of Independent States) region, particularly for Russia’s larger regional trading partners.

“The escalation of the ongoing conflict in eastern Ukraine combined with sanctions on Russia and low oil prices, continue to cast a shadow over the region,” the report states. “Russian trading partners in Europe and regional partners such as Belarus and Kazakhstan will be affected by conditions,” it adds.

Country moves summarized - Source: Aon Risk Solutions - 2015 Political Risk Map, Aon's Guide to Political Risk in Emerging MarketsThe report notes that Russia and Ukraine remain extremely difficult places for businesses to operate, with severe corporate financing pressures and government intervention in the economy having increased.

Citing the Russia-Ukraine conflict, “recurrent negotiations, a possible frozen conflict and continued sanctions will likely characterize the situation, with resolution unlikely in 2015. Meanwhile, weak growth and recession in Russia and Ukraine will put more pressure on not only government balances, but also on corporations and banks, increasing the risk of corporate defaults as well as sovereign arrears,” the report adds.

“Emerging markets continue to be attractive for businesses seeking alternative areas for growth. However, in less mature economies, assets, contracts and loans can be adversely affected by government action or inaction,” states the report. “Planning ahead and adapting risk strategies according to the level of risk in countries of interest is of the utmost importance.”

Matthew Shires, Aon’s head of political risk, would likely agree. “By using the latest data and analytics, the political risk map helps organizations determine their emerging market investment strategies. Businesses need to constantly monitor their exposure to political risk, such as the impact of oil price uncertainty and political instability,” Shires says in the Aon statement.

“The quarterly updates to the risk icon scores and the country ratings highlight developing risk-trends, allowing investors to respond quickly to deterioration and to better hedge their exposure or take advantage of new opportunities,” adds Paul Domjan, managing director of Roubini Country Insights.

With the launch of last year’s political risk map, exchange transfer risk, sovereign non-payment risk, political violence and political interference were all identified. “All of these key trends proved to be present over the course of the year and many will continue through 2015,” the report states. “On a regional basis, we highlighted the relative resilience of some of the richer oil exporters in the Middle East ve
rsus their North America peers.”

Looking into 2015, the report notes “the fight for market share in the global trade environment and sharp moves in currency markets have put pressure on many emerging and frontier markets, particularly with regard to exchange transfer risk, sovereign non-payment risk and political interference.”

Aon sees the following global and regional themes as relevant for 2015:

• Ongoing conflicts within countries and with non-state actors create heightened levels of political violence and present new risks (cyber security). Groups like ISIS, Boko Haram and others take advantage of porous borders and weak institutions across parts of the Middle East and Africa.

• Deterioration in economic risks (exchange transfer and sovereign non-payment). Weaker commodity prices will perpetuate exchange transfer and sovereign non-payment risks in producing countries. While only Venezuela looks very vulnerable, all such countries will face some increase in economic risk.

• While the U.S. rate hiking cycle is likely to be modest, it implies more competition for capita, which could increase pressure on local exchange rates, increasing inflationary pressures and raising the cost of servicing external debt.

• Differentiation in risks among oil exporters. Those with more resilient institutions and more savings will proved better-equipped, such as GCC, Colombia, Malaysia and Kazakhstan, versus those more institutionally vulnerable to the slump, namely Angola, Ghana, Venezuela, Russia and Ecuador.

• The Russia-Ukraine conflict will weigh on the CIS region as sanctions perpetuate high levels of government intervention and institutional risks.

• Resilience in Latin America energy importers and signs of reform.

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