The Markets Group of Alliant Insurance Services has compiled a comprehensive report – the 2011 Global Macro Risk Ratings – which examines the the insurable political and economic risks in 175 countries.
Alliant noted that the report comprises “some 1,300 risk ratings—including political risk ratings for 60 OPEC and non-OPEC oil- and gas-producing countries.” It also includes key trends regarding expropriation and sovereign issues.
Dr. Michel Léonard, chief economist and senior vice president for Alliant’s Emerging Markets Group, explained that the demand for systematic global macro data and analytics has increased “exponentially” since the beginning of the current recession.
“Badly hurt by the poor performance of traditional economic models and new regulatory disclosure rules, portfolio managers and executives made identifying the impact of sovereign risk on their strategies a cornerstone of delivering returns and outperforming benchmarks,” he noted.
“The current events in the Middle East have brought political risk back to the fore of global investors and markets,” he added. “In this year’s risk ratings report, we have added new indices tracking risk levels across that region as well as for the oil and gas sector.”
Highlights of the Report cover the following:
Emerging Markets Headwinds
Global political and economic risk levels were on the rise over the last 12 months, with Alliant’s Political & Economic Risk Index (ABEM PERI), a benchmark index tracking global macro risk levels, down 0.93 points for the year to 68.30. Emerging markets, which experienced improvements across all major risk indices in 2009, suffered a reversal in 2010 with expropriation and creeping expropriation (ECE) and legal, regulatory and licensing (LRL) risks on the rise across all regions except Eastern Europe. Resource nationalism, especially in the energy sector, was a key driver behind this trend, pushing Alliant’s ECE and LRL global indices down by 3.5 points in the last 12 months.
Oil & Gas: Political Risk in the Middle East & Beyond
Looking to 2011, we expect emerging markets ECE and LRL risk indices to deteriorate further as a result of three key drivers: 1) growing resource nationalism in the energy sector, 2) underdeveloped legal and regulatory systems in frontier markets incapable of meeting the challenges of capital and investment inflows, and 3) governments actively challenging investors’ recourse to international arbitration, and now the threat of uncertainty in the Middle East. In addition to those variables, Alliant’s watch list for the energy sector includes a possible renationalization of the energy sector in Brazil, actions against foreign investors in Ghana and West Africa, and the World Bank’s growing political intrusion into arbitration procedures at ICSID.
Sovereign Risk Contagion
Global credit conditions, as tracked by our trade credit (TC) and currency inconvertibility and transfer (CITR) risk indices improved over the last 12 months by an average of 3.83 points. However, the margin of improvement in the OECD was twice as large as in emerging markets. While growth in emerging markets will continue to outperform the OECDs, our data points to a rebalancing of global credit risk levels away from the latter and into the former going into 2011. We expect this trend to accelerate going into the third quarter as inflation, monetary tightening, and potential contagion from the Euro zone sovereign debt crisis negatively impact emerging markets credit quality at the sovereign, corporate, and consumer levels.
Source: Alliant Insurance Services
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