Political risk in China and Iran decreases; Aon presents the 2016 Political Risk Map

Political risk map 2016

The lifting of sanctions reduces political risk in Iran and attracts the interest of investment capital; anti-corruption measures contribute to reducing risk in China. These are two of the main conclusions of Aon's Political Risk Map 2015, which for the first time in the last 3 years records more upgrades of emerging countries than downgrades: 8 countries have improved their Risk rating compared to 2015 (China, Iran, Pakistan, Ethiopia, Serbia, Jamaica, Nepal and Haiti), while only four countries have increased their political risk (Cape Verde, Micronesia, Philippines and Suriname).

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Also lThe continued decline in oil prices increases political risk in already fragile areas such as Libya, Russia and Venezuela, while the recession in Brazil poses a major challenge to the country's social stability.

 

Aon’s 2016 Political Risk Map is an authoritative analysis of 162 emerging markets that tracks 168 identified risk attributes. Aon’s privileged access to over 19 years of data allows users to systematically monitor risk in emerging market countries, analyse trends, measure risk exposure and review the potential risks they may face if they decide to invest, grow or diversify.

 

“For the first time in the last three years, the Aon Political Risk Map shows more countries with reduced levels of political risk than with increased levels, an encouraging sign regarding the effects of economic reforms,” said Fernando Villarrubia, Executive Director of Political Risk & Surety at AonRisk Solutions for Spain and Portugal. “Despite the increase in economic risks arising from low commodity prices, there have been improvements in political stability. However, the fragility of the global economy could still cause significant increases in political risks in countries and collateral effects in other states.”

 

The adjustments in China represent a slight reduction in domestic risks but may intensify them abroad

 

Anti-corruption measures have contributed to a decline in political risk in China over the past year. However, recent implementation problems and political uncertainty have clouded the overall outlook. The adjustment and slowdown of the world's second-largest economy may prove challenging for China's neighbours and major trading partners, who could face heightened political and economic risks as the pace and drivers of growth change. There have been recent signs of improved policy communication, but risks remain, particularly those related to the creation of greater leverage in the Chinese banking system.

 

The outlook for many emerging market economies will depend on whether policymakers are able to implement promised reforms to attract more investment at a time when weaker global trade and economic growth are increasing competition for capital. Moreover, many plans for structural reforms have been thwarted, weakening growth and reducing resilience to potential shocks. Two countries in focus are India and Indonesia, which have reported stronger balance sheets than many of their peers but are struggling to implement policies. Doing so would help reduce their political risks.

 

Lifting sanctions reduces political risk in Iran but future behavior needs close monitoring

 

In Iran, the implementation of the international Joint Comprehensive Plan of Action (JCPOA), which has allowed for the easing of international sanctions, has led to an improvement in the country's political risk rating in 2016, which started at a very high level. With uncertainty about the role that the Revolutionary Guard and other groups with special interests will play in the economy, the operating environment is unclear. A stronger position by the government could lead to an Iranian intervention in some part of the region, perpetuating the political risk in the area.

 

“Iran’s re-entry into global markets will increase oil supply and eventually gas supply as it gains access to more foreign markets including Europe,” said Rachel Ziemba, Managing Director of Research at Roubini Global Economics. “Iran has a more diversified economy than many of its Middle Eastern and African competitors and has made a greater effort to adapt to low oil prices.”

 

The drop in oil prices increases the already existing fragility of crude-dependent markets

 

At the top of the list of political risks facing emerging market investors is the impact of oil prices on already fragile oil-dependent countries such as Libya, Russia and Venezuela. Aon’s 2016 Political Risk Map indicates that countries with stronger institutions and larger foreign exchange reserves will be better positioned to minimize risks from sovereign debt default and currency fluctuations, including members of the Goulf Cooperation Council (GCC) as well as Colombia, Malaysia and Kazakhstan. Also in countries such as Egypt, Tunisia or Morocco, security-related risks in some neighbouring countries such as Iraq, Algeria, Nigeria, Libya and Syria may become an obstacle to improving risk outlooks due to lower oil prices.

 

“Oil producing and exporting countries will have to seek substitute revenues to try to balance their fiscal balances. This may affect the corporate sector with adjustments in tax rates and through the privatisation of some state-owned companies,” says Pablo García Horcajo, Head of Political Risk and Structured Credit at Aon Risk Solutions from its headquarters in London. “With no signs of oil prices returning to pre-crisis levels, the turmoil in many oil producing countries will continue and may even worsen.”

 

Lower oil prices are increasing currency transfer risks, adding pressure on corporations and individuals seeking foreign currency and discouraging investors. At the same time, reduced revenues are leading to an increase in the risk of sovereign debt default. Although only a few countries have significant foreign currency debt burdens (Venezuela), government budget mismatches are widening, adding pressure on banks, which in response are perpetuating a credit squeeze in GCC, CIS and African oil-producing countries. In some of the most vulnerable countries, government arrears are increasing, adding further strain to the private sector.”

 

Conflicts between countries and with other actors are the source of higher levels of political violence and other risks. The effectiveness of extremist groups in the Middle East and Africa, including ISIS and Boko Haram, which exploit porous borders and weak institutions, will also be greater in affected countries, many of which are also suffering from lower oil prices. Even in some countries that appear more resilient, higher taxes and higher unemployment could add to political tensions, further hampering their ability to cope with other crises.

 

Brazil hosts the Olympics at the height of its recession in decades

 

Finally, as Rio de Janeiro prepares to host the 2016 Summer Olympics, Brazil's longest recession since 1930 poses a major challenge to the country's social stability.

 

Although many of the factors driving the crisis are political, including the deadlock between political parties that has left fiscal and economic policies in limbo, rising unemployment and falling wages are affecting individuals and businesses alike. In 2016, non-performing assets at public banks will continue to increase debt and borrowing costs, while the political deadlock will erode the country's ability to cope with various economic, social and health crises, such as the Zika virus.

 

 

 

“The Brazilian economy is experiencing its longest recession in recent history just as it prepares for Rio 2016,” says Paul Domjan, Managing Director of Roubini Global Economics. “In the long term, the business environment has been weakened by poor economic performance, and this could become an even bigger problem for firms operating in Brazil. Brazil’s reserves are eroding, and even the potential improvement from the fight against corruption is causing significant collateral damage as cases are processed through the legal system.”