March 9, 2016 by Canadian Underwriter
For the first time in the last three years, more countries on the Aon Political Risk Map 2016 for emerging markets show political risk reductions than increases, although continued low oil prices is exacerbating political risk in already-fragile states.
“Anti-corruption reforms and the lifting of sanctions eased political risk in China and Iran, respectively, while other states struggle to counteract the economic risks being driven by weak commodity prices,” notes a statement Tuesday from Aon Risk Solutions, the global risk management business of Aon plc.
The map – reflecting an analysis of 162 emerging markets tracking 168 different recognized risk attributes – illustrates that eight countries experienced a quantifiable reduction in political risk (China, Iran, Pakistan, Ethiopia, Serbia, Jamaica, Nepal and Haiti), while just four countries increased their overall political risk (Cape Verde, Micronesia, Philippines and Suriname).
The map – for each specific risk category and overall rating, each country is rated as low, medium-low, medium, medium-high, high or very high – allows users to track political risk in emerging market countries, plot trends, measure exposures and review the potential challenges they may face as they look to invest, grow and diversify. Member countries of the European Union and the Organisation for Economic Co-operation and Development are not rated in the 2016 map.
For the first time in the last three years, the map “reflects more countries with reductions in political risk than increases, an encouraging sign of the impact of political and economic reforms,” Karl Hennessy, president of Aon Broking and CEO of Aon’s Global Broking Centre in London, says in the statement.
“Despite increases in economic risks stemming from low commodity prices, improvements in political stability have occurred. However, weakness in the global economy could yet cause significant increases in political risks within countries and spill-over effects into others states,” Hennessy explains.
“Topping the list of political risks facing emerging market investors in 2016 is the impact of oil prices in already fragile oil-dependent countries such as Iraq, Libya, Russia and Venezuela,” Aon reports. The map indicates that countries with more resilient institutions and greater foreign currency reserves will be better-positioned to minimize sovereign non-payment and exchange transfer risks, including members of the Gulf Cooperation Council (GCC) as well as Colombia, Malaysia and Kazakhstan, the statement notes.
Still, “increased security risks in neighbouring countries such as Iraq, Algeria, Nigeria, Libya and Syria are likely to hinder improving risk outlooks for countries that might stand to benefit from cheaper oil, like Egypt, Tunisia and Morocco,” the map indicates.
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“Oil-producing nations must find substitutes for lost revenues, which will put pressure on their corporate sectors at a minimum through tax regime adjustments and at the extreme through IPOs of state-owned enterprises,” says Matthew Shires, head of political risk for Aon Risk Solutions. “With no sign of oil prices returning to previous levels, turbulence in many oil-producing states is likely to continue, and could worsen.”
Overall, ongoing conflicts between countries and with non-state actors create heightened levels of political violence and present further risks, Aon notes. “Even in countries which look more resilient, increased taxes and higher unemployment are likely to add to political strains making it harder for them to cope with other shocks,” the company statement adds.
Although anti-corruption measures have contributed to a decrease in political risk in China, “recent implementation issues and policy uncertainty have clouded the overall outlook,” Aon cautions. “The rebalancing and slowing of the world’s second largest economy is likely to present challenges for China’s neighbours and key trading partners, who could experience higher political and economic risks as the pace and composition of growth changes,” the company points out.
In Iran, Aon reports, the implementation of the international Joint Comprehensive Plan of Action loosening international sanctions, prompted a reduction in the country’s political risk rating in 2016 from a very high level. But the “operating environment remains unclear. A stronger government position could lead to Iranian intervention elsewhere in the region and perpetuate regional political risk,” the map shows.
“Iran’s re-entry to global markets will increase the supply of oil, and eventually gas, as it gains access to more foreign markets, including Europe,” says Rachel Ziemba, managing director of research at Roubini Global Economics (country ratings on the map reflect a combination of analysis by Aon Risk Solutions and Roubini Global Economics). “Iran has a more diversified economy than many Middle Eastern and African peers, and has done more to adjust to lower oil prices,” Ziemba continues.
Elsewhere, as Rio de Janeiro readies to host the 2016 Summer Olympic Games, the increase in unemployment and falling wages is challenging both households and companies.
“The Brazilian economy is experiencing its most prolonged downturn in recent history as it prepares for Rio 2016,” says Paul Domjan, managing director of Roubini Global Economics.
“Over the long run, the business environment has been weakened by poor economic performance and this could become an even bigger issue for firms operating in Brazil. Brazil’s buffers are being eroded, and even the potential upside from rooting out corruption is bringing significant collateral damage as cases work their way through the legal system,” Domjan explains.
In general, “the outlook for many emerging market economies will be based on whether politicians are able to implement pledged reforms to attract more investment at a time when weaker global trade and economic growth is increasing competition for capital,” notes the Aon statement. “So far, many of the structural reform plans have disappointed, weakening growth and reducing resiliency to shocks,” the company suggests.