Political risk map newsletter Q3 2015
Aon's quarter 3 issue of their Political Risk newsletter
Published on: Mar 4, 2016
Transcripts - Political risk map newsletter Q3 2015
Risk. Reinsurance. Human Resources.
This quarter, only one country—Serbia—
experienced an improvement in its Country Risk
Rating, moving to medium from medium-high.
No country experienced sufficient deterioration in
the political risk situation to warrant a downgrade
in its overall Country Risk Rating. This is a change
from recent quarters, when risk rating
downgrades have dominated.
Nonetheless, several countries have experienced
a change in some of their individual risk scores,
which can be a precursor for an overall change in
a Country Risk Rating and should be monitored
One of the countries that saw an improvement in
individual risk icon scores was Nepal, which
experienced an improvement in economic
resilience and a decline in political violence risk.
Weighing against these improvements is the
government’s ongoing challenge in dealing with
continuing earthquakes and aftershocks.
Countries with a deterioration in individual risk
icon scores include:
• Saudi Arabia, Iraq and Angola, all of which
experienced higher economic risks as lower
oil prices weakened economic resilience.
• Brazil, where government intervention risk
in key sectors has increased and recent
political scandals have reinforced persistent
Two Asian countries – Thailand and China –
experienced significant political or policy shocks
respectively, suffering a terrorist attack and
significant crisis of confidence on economic
performance. We see these events as consistent
with each country’s overall medium-high country
risk rating. Thailand has a high political violence
score which is already reflective of the divides
within the country, although other areas of
political risk are much lower.
In China’s case, we have long highlighted the
extensive intervention of the government within
the economy, and continued challenges around
the business environment. The August 2015
market sell-off in China reflected uncertainty
about the government’s policy stance and its
ability to stabilize the economy and cope with
shocks. The situation is still ongoing and the
structural slowdown in China’s economy will
pose considerable political and operational risk.
Aon Risk Solutions | Political Risk
with Roubini Global Economics, an independent, global research firm founded in 2004 by renowned
economist Nouriel Roubini. The newsletter is released on a quarterly basis and provides insight into
levels and types of Political Risk in non-EU and -OECD countries.
In this Issue
2 Regional overview
of political risks
3 In the spotlight this
quarter - Iran’s Nuclear
Agreement and Regional
3 Country Risk Rating
4 Key Contacts
Political Risk Newsletter | Aon Risk Solutions | Q3 2015 2
Regional overview of political risks
Political risks have generally increased in Asia, with recurring
corruption issues impairing Malaysia’s policy management, conflict
and terrorism in Thailand hitting investment and the Indonesian
government continuing to impose FX restrictions, while being
wary of foreign investment. In China, also, continued protests and
government intervention in the stock and currency markets has
added volatility and uncertainty, while contributing to an elevation
in public dissent. This economic, policy and rates uncertainty could
weigh on economic and financing for some of China’s key trading
partners in Asia, as well as commodity producers globally.
Eastern Europe and CIS
The deep recession in Russia and loss of remittances has put pressure
on its CIS and Central and Eastern European trade partners, a trend
that has been amplified by oil export declines. The depreciation of
the Russian ruble has hurt countries such as Kazakhstan, which is
likely to require greater currency depreciation. And the Ukrainian
conflict is again heating up in the far east of Ukraine, which suggests
sanctions will remain in place for some time. Meanwhile, Ukrainian
debt restructuring is set to continue, which is likely to set off a wave
of corporate arrears. On the upside, the Ukrainian government is
taking some steps to improve the business climate—which could,
over time, make it a more reliable place for foreign investors.
Latin America and Caribbean
The region remains generally stable, although a notable rise in
political discontent and weak commodity prices threatens this. Latin
America has experienced the most extensive deterioration of growth
expectations across major emerging-market regions, which has
added to political pressure. Popular support for governments is low
across many of the region’s major economies, including Colombia,
Chile and Mexico. Brazil’s President Dilma Rousseff, in particular,
has plumbed new depths in terms of popularity ratings and, with
corruption scandals affecting many key politicians, policy making
will be very difficult, and the chance of impeachment and/or early
elections has risen.
The Caribbean, meanwhile, has generally benefited from the lower
oil prices as most countries are sizeable net importers. Domestic
policies remain stable, although the region as a whole remains
Middle East and North Africa
Across the region, political risk has increased or remained high as
internal and regional conflicts continue and extremist groups like
ISIS, Boko Haram and AQIM remain meaningful threats to domestic
stability and a drain on public finances. At the same time, lower
oil prices have exacerbated economic and financial risks for oil
producers. Some, like Algeria and Iraq, are finding it very difficult
to cope and have maintained or increased exchange transfer
restrictions. Others, such as the Gulf Cooperation Council states,
have significant domestic resources to support their policies.
Nonetheless policy space is declining, while Iran’s potential re-entry
to global markets will exert further downward pressure on oil
prices, while also increasing incentives for maintaining high defence
Weaker commodity prices, especially oil and gas, have put pressure
on several regional producers, including Angola and Nigeria, which
have experienced an increase in exchange transfer risk as they
have sought to avoid currency depreciation. Political violence risk
also remains high in these countries and, in Nigeria, we are closely
watching the (slow) formation of the new government, which takes
office in an environment without many policy levers. The recurrence
of Ebola in Sierra Leone will keep pressure on its other institutions,
while impairing infrastructure development.
Political Risk Newsletter | Aon Risk Solutions | Q3 2015 3
In the spotlight this quarter
Iran’s Nuclear Agreement and Regional Political Risk
The nuclear agreement between Iran, the EU and the five permanent
members of the UN Security Council has the potential to meaningfully
change Iranian and regional political risk. In this feature, we look at the
way in which Iran’s own risk ratings might evolve and how these
trends could affect the Middle East and other oil producers.
Assuming the agreement passes some key hurdles, nuclear-related
sanctions will gradually be suspended in 2016, paving the way for
more meaningful oil output volumes, investment in Iran and an
increase in Iran’s policy space to stimulate the economy.
By contrast, weaker oil prices will maintain the economic pressure on
neighbouring oil producers, who will need to contend with falling
revenue while seeking to maintain, or even increase, defence
spending to deal with the perceived threat of a newly invigorated
What is the possible impact on Iran’s Country Risk Rating?
We have maintained Iran’s very high Country Risk Rating given
continued political and implementation uncertainties, it’s involvement
in regional conflicts and the economic strains that come from low oil
Iran’s high risks are not solely related to its nuclear program. Even
before the 2010-11 round of sanctions, Iran was rated as high or very
high risk due to the high levels of political violence, rampant and
worsening government intervention in the economy under the
Ahmadinejad regime and a very difficult business environment.
Expropriation risk was meaningful and government entities were often
in arrears to their private and quasi-public counterparties.
Economic and financial risks should ease slightly as the suspension of
sanctions gradually unlocks Iran’s foreign assets and reduces import
transaction costs. Although recent guidance from the U.S. and Iran
suggests government reserves are smaller than the USD 150 billion
estimate that was circulating a few months ago, the expected trade
and investment linkages should nevertheless materialise.
We expect Iran to regain access to its foreign official holdings, either
gradually or in lump sum. Iran has an estimated USD 100 billion-150
billion in foreign assets in accounts it can access only under
restrictions. If financial and insurance sanctions are also lifted, this
would increase its ability to transmit payments, even if it doesn’t
change its willingness to pay.
The Rouhani administration has been pushing forward with economic
reforms. These policy changes could bring improvements in legal and
regulatory risk, government interference and, of course, ease of doing
business, but these will take time.
Iran’s Country Risk Rating will thus depend on the lifting or suspension
of sanctions that removes the risk of legal judgement/confiscation and
fines and allows Iranian entities to return to global banking markets.
And Iranian policy choices surrounding support to business and
economic reforms, as well as fiscal and monetary policy to make it
easier for the local private sector to access finance and operate.
The Rouhani administration, which is more technocratic than past
regimes, has already improved policy making and the policy
trajectory, and it is possible the government will move forward with a
range of structural and fiscal reforms, probably under IMF guidance.
Companies, particularly in Europe and Asia, are intrigued by the
opportunities in Iran. Many are slowly assessing the operating
environment and setting up exploratory groups to examine the
regulatory burdens. Iran’s economic structure and over-indebted
banks suggest it will be reliant on foreign investors to finance any new
Whether companies sign deals in the oil or other sectors with Iran
depends both on the sequencing of the suspension of sanctions, but
also on the terms of any investment agreement. Given the excess
supply in the global oil market, Iran may need to offer competitive
terms to secure new investment deals.
Economic risks will likely ease from the period when sanctions were
tightest, but Iran’s private sector may struggle to partner with global
players, given issues around corruption and the lack of credit. Iranian
banks have engaged in significant politically motivated lending that is
only slowly being cleaned up, so they will struggle to support the
private sector and provide funding.
Country Risk Rating Overviews
Improvement to country risk rating:
Serbia’s moderately high levels of political risk are set to reduce
gradually as the country progresses towards EU accession over the
next half decade. While Serbia has high and rising public debt,
its new IMF program, as well as funding from the UAE, could help
stabilise macroeconomic policy. We have subsequently noted a
reduction in exchange transfer and sovereign non-payment risks.
Political violence risks are low, but legal and regulatory burdens
remain high, and corruption and political interference is worse than
in many of its recently acceded peers.
Although a low risk, the conflict between Russia and the Ukraine
could spill over to Serbia, which has historical ties to Russia. Indeed,
Russia and the Gulf states are major investors in Serbia, which could
counter the incentives of possible EU membership.
Risk. Reinsurance. Human Resources.
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About Roubini Global Economics
Roubini Global Economics (RGE) was founded in 2004 by Professor Nouriel Roubini. Through his national balance
sheet approach to analysing economies, Nouriel Roubini foresaw the coming US housing crisis and was eager to
bring the same approach to analyse the rest of the world. Now numbering nearly 100 staff around the world,
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Aon Crisis Management
Head of Political Risk
Head of Political Risk Analytics
Roubini Global Economics