Aon’s New Political Risk Map Highlights ‘BRICS’ Increased Risks

April 11, 2014

Aon Risk Solutions, the global risk management business of Aon plc, has unveiled its 2014 Political Risk Map, which identifies an increased risk rating for all five emerging market BRICS countries.  Aon noted that “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.”

Aon said it has downgraded Brazil’s rating as “political risks 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 also downgraded “largely due to recent developments with the Ukraine and the annexation of Crimea,” Aon said. “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. 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 too was downgraded, due, Aon explained, to “elevated” legal and regulatory risks 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 on the map, caused by a “deterioration in political risk, including an increase in political violence,” which, Aon said “has occurred at a time of slowing economic growth, which suggests that the economic policy deadlock and economic sluggishness are mutually reinforcing.”

South Africa’s rating was also downgraded, “despite having strong political institutions.” Aon explained that- the country 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.”

Matthew Shires, Head of Political Risk, Aon Risk Solutions, said “By using the latest data and analysis capabilities, Aon’s interactive online map provides clients with unprecedented clarity when assessing their emerging markets political risks.  By way of an example, the volatile situation in the Ukraine began to be highlighted in our quarterly updates in mid-2013.  These quarterly updates assist our clients’ in their strategic and financial decision-making.  The degree of risk and exposures vary considerably in the emerging markets and this highlights the need for institutions to be able to generate their own high level overview of political risk and how it affects them; for this they need access to a sophisticated risk tool such as the online map.”

Aon’s bulletin explained that the “map measures political risk in 163 countries and territories, in order to help companies assess and analyze their exposure to exchange transfer, legal and regulatory risk, political interference, political violence, sovereign non-payment and supply chain disruption.

“Aon’s long-standing strength in Political Risk management is complemented by partnering with Roubini Global Economics (RGE), an independent, global research firm founded in 2004 by renowned economist Nouriel Roubini, in order to take advantage of RGE’s unique methodology.”

Paul Domjan, Managing Director, Roubini Country Insights, said: “Roubini Global Economics is proud to continue to partner with Aon to deliver this insightful approach to mapping political risk and political violence for its clients.  This year the political risks in emerging markets have risen, particularly in the some of the largest economies.  Our quarterly scores give an updated picture of developing risks, helping investors respond quickly to deteriorating balance sheets and better hedge their exposure.  Once again, the map demonstrates the power of combining RGE’s country analysis and benchmarking with Aon’s expertise in country risk.”

Additional features on this year’s map included the following:

Deterioration in Commonwealth of Independent States; analysis of conditions in the Caucasus, Armenia and Azerbaijan, as well as the Ukraine, Belarus, Georgia and Moldova.

Aon indicated that “Ukraine’s position deteriorated throughout 2013, which culminated in a downgrade to High risk in Q3 from Medium High. The annexation of Crimea by Russia, and government collapse was already consistent with a country with a high political risk, but the implications of these developments warranted a further downgrade in political risk – Ukraine is now a Very High risk country.”

Divergence Widening within Middle East and North and West Africa:  Developments in 2013 have reinforced the relative strength of the richer oil exporting 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.

Sub-Saharan Africa Divergence: There are 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.

By contrast political conditions deteriorated, particularly in Swaziland, which is being supported by its neighbors financially, and suffered a broad-based increase in political risk and economic strain which added to expropriation risk.  South Africa, despite having strong political institutions is struggling from recurrent strikes, which have become the major means of wage setting, and which weaken the outlook for business.

The 2014 upgrades and downgrades in Country Ratings were listed as follows:

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.

Aon explained that the map’s country ratings “derive from six core Risk Icons, which represent insurable risk; identifies as: “Exchange Transfer; Sovereign Non-Payment; Political Interference; Supply Chain Disruption; Legal and Regulatory; Political Violence; Risks to Doing Business; Banking Sector Vulnerability, and Risks to Fiscal Stimulus.

Source: Aon Risk Solutions

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