China’s “war on graft” and the relaxation of international sanctions aimed at Iran have improved the political risk outlook for those two countries, suggests a new political risk map from Aon Risk Solutions.
However, continued flatlining oil prices are exacerbating political risk in already fragile states, noted the broker.
Economic and political issues will challenge Brazil ahead of the Rio 2016 Olympic Games, the report also warned.
“For the first time in the last three years, the Aon Political Risk Map reflects more countries with reductions in political risk than increases, an encouraging sign of the impact of political and economic reforms,” said Karl Hennessy, president of Aon Broking and CEO of its London broking hub.
The Aon Political Risk Map looks across 162 emerging markets, tracking 168 risk attributes using 19 years of risk data.
“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,” said Hennessy.
Over the last year, anti-corruption measures have contributed to a decrease in political risk in China, noted the risk map, but recent implementation issues and policy uncertainty have clouded the overall outlook.
“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,” said Aon.
“Recently there have been signs of an improvement in the communication of policy, but risks remain, particularly around the building up of further leverage in the Chinese banking system,” added the broker.
The outlook for too many emerging economies is hostage to politics, the report warned, as political reform is challenged by weaker global trade and the risk of further capital flight.
“Two in the spotlight this year are India and Indonesia, who have stronger balance sheets than many peers, but who have been struggling to implement policies. Doing so would help alleviate political risks,” said the risk map.
On Iran, the report is cautious about the outlook, but suggests the removal of sanctions is a cause for some limited political risk optimism, despite the Middle East’s oil-based, security and instability travails.
“In Iran, the implementation of the international Joint Comprehensive Plan of Action (JCPOA) loosening international sanctions, prompted a reduction in the country’s political risk rating in 2016 from a very high level,” said the report.
With uncertainty around the extent to which the country’s Revolutionary Guards and others with vested interests will play a role in the economy, the operating environment remains unclear, suggested Aon.
“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,” said Rachel Ziemba, managing director of research at 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,” said Ziemba.
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.
“With no sign of oil prices returning to previous levels, turbulence in many oil producing states is likely to continue, and could worsen,” said Matthew Shires, head of political risk at Aon Risk Solutions.
Aon said the political risk map indicated 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, as well as Colombia, Malaysia and Kazakhstan.
“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,” said the report.
For Brazil, as Rio de Janeiro readies to host the 2016 Summer Olympic Games, Brazil’s longest recession since the 1930s remains a significant strain on the country’s social resilience, the study noted.
“The Brazilian economy is experiencing its most prolonged downturn in recent history as it prepares for Rio 2016,” said 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,” added Roubini.