Emerging markets face increased political risk in 2014

Elections, political reforms and a shifting balance in world power are all factors to watch in 2014. However, experts say the most prominent and worrying trend is the increase in political risk associated with the growing pains of emerging markets. While Aon’s 2014 Terrorism and Political Violence Map appears to suggest the world is getting less risky in terms of political violence and terrorism, the situation is more nuanced and, on balance, not positive, said Henry Wilkinson, Head of the Intelligence and Analysis practice at Aon Risk Advisory. According to the Aon report some 34 countries received reduced country risk scores this year, while only four countries saw increased risk—Brazil, Japan, Mozambique and Bangladesh.hideMr Wilkinson explained that the US, Europe, parts of the Middle East and west Africa saw improvements in political violence risk, but that many emerging market economies continue to be affected by civil commotion and terrorism. “The map shows a widening of political violence and terrorism risk between the western world and emerging markets. Western countries are pulling away while many emerging markets are locked into a high risk situation, while some have seen the risks of civil commotion and terrorism increase in 2013,” he said. Following over a decade of growth, emerging markets are now at a turning point, according to Ray Antes, Head of Political risk at AIG. The effects of tapering US quantitative easing, lower commodity prices, falling incomes and dissatisfied populations are some of the main trends impacting the political risk landscape in 2014, particularly in emerging economies. Companies increasingly have to operate in emerging markets as they search for revenue growth and tap the consumers of tomorrow, pointed out Alyson Warhurst, Chief Executive at political risk consultant Maplecroft. However, all 30 of the leading growth markets identified by Maplecroft have some degree of dynamic political risks. Over one third are deemed extreme or high risk, including India, China, Indonesia, Thailand and Nigeria. Societal risks, in particular, are rising as populations in emerging markets show their growing dissatisfaction with inequality, according to Ms Warhurst. Some countries, such as China, are better at balancing growing incomes and economic growth with political freedoms, working conditions and education. But in other countries, human rights and political freedoms have been eroded in recent years, she continued. Political risk varies greatly by region and by country, but there are emerging trends around societal risks, according to Crispin Hodges, a political risk underwriter at Beazley based in Paris. Populations are rising in many emerging markets, especially the number of citizens under 30 years of age, while the middle classes are expanding in high growth markets. However, governments are finding it increasingly difficult to support their booming populations and meet expectations for employment and public services, explained Mr Hodges. Populations in emerging markets are also increasingly unwilling to put up with corruption and cronyism, especially if living standards are falling, he added. “Political risk in the short term will be heightened as emerging markets grow and reach adolescence, struggling to meet the needs of their growing, and increasingly younger, populations,” said Mr Hodges. This trend is resulting in increased civil unrest—as seen in Brazil, Thailand and Ukraine last year—as well as violent labour disputes, as witnessed in the South African mining sector. It also means that foreign companies could find themselves targets of political violence or unwanted government attention, such as expropriation or nationalisation, said Mr Hodges. Levels of already heightened political risk are likely to grow further in emerging markets over the next few years, predicted Jonathan Wood, Associate Director and Analyst at political risk consultant Control Risks. Key emerging markets, including Brazil, Nigeria and Turkey, face difficult times ahead after enjoying long periods of growth, he said. Expectations and political demands among their populations have risen, reflected in protests and civil unrest in the past year. Sub Saharan Africa has also witnessed unrest amongst populations less inclined to accept the status quo. The region has lots of growth potential, but corruption, unemployment and inequality are problematic. The government in South Africa has come under increasing criticism for just these issues, explained Mr Wood. National elections in 2014 and 2015 in countries like Brazil, Argentina, Indonesia, Nigeria and South Africa could also result in civil unrest ‘flare ups’ or government-led nationalism, according to Mr Wood. The World Cup in Brazil and the passage of difficult reforms, such as tax reforms in Mexico, could also spark unrest, he added. Popular unrest in Brazil is likely to continue ahead of elections, according to Elizabeth Stephens, Head of Credit & Political Risk Analysis at Jardine Lloyd Thompson. Brazil has made great economic strides, growing its middle class significantly and lifting millions out of poverty. However the country has benefited from cheap credit linked to low interest rates in the US and as these rates increase small businesses and the middle classes could suffer. In a bid to manage the expectations of its population, the Brazilian government could resort to nationalist measures, explained Ms Stephens. Government-led political risks have been growing, according to Mr Hodges. In the past, governments used ‘blunt instruments’ such as nationalisation and expropriation, but ‘creeping expropriation’ and other subtler and sophisticated mechanisms are now being employed to gain control of assets or raise revenues from foreign companies without deterring direct foreign investment, he said. Regulatory risk is likely to be an increasing threat in emerging markets going forward, agreed Nuria Gorog, Head of Credit & Political Risk in Continental Europe for Zurich Insurance. An economic slowdown in some markets could prompt governments to react with more protectionist measures. These, while sometimes temporary, make it more difficult for foreign companies to do business, especially those in regulated sectors like energy, utilities or mining, she said. “Economic deterioration in emerging markets could have important consequences for foreign companies. Governments may resort to exchange controls or seek to renegotiate contracts, putting the business of some multinationals in jeopardy,” said Ms Gorog. “We have already seen expro-priation in Argentina and Bolivia, but governments in other countries are using more subtle measures. For example, some of our clients exporting to one of the major emerging economies have found that public bodies have unfairly executed warranties and bonds, even though they have performed under contract law,” said Ms Gorog. Resource nationalism and expropriation is set to continue as countries look for sources of revenue and manage societal risk, according to Maplecroft. Over the past 12 months, the risk of resource nationalism increased in 15% of countries, with Latin America and Sub Saharan African territories dominating the highest risk category. Venezuela, Bolivia, Zimbabwe, Congo, Libya, Myanmar and Argentina are all at risk of resource nationalisation, while South Africa, Brazil, India and Indonesia are countries to watch ahead of national elections in 2014. East Africa has also moved to high risk, reflecting increased threat in Kenya and Mozambique. Shifting powers on the international stage could also heighten political unrest in the coming years. In its quest to access and control natural resources, China has gained influence in emerging markets like Africa and Latin America. “Historically, countries have been beholden to organisations like the World Bank and the International Monetary Fund, as well as the US. But increasingly we see China and Russia, two countries with a different code of ethics in business, hold more sway—which could lead to more political risk,” said Mr Hodges. The retreat of US power, together with a shift in Middle East oil exports from the US towards Asia, is affecting the political landscape, said Mr Wood. “The reduction in US influence—the key to the global framework of governance—adds to political instability and uncertainty,” he said. This is also giving more space for regional players to exert their influence—such as Saudi Arabia and Qatar’s support of opposition groups in Tunisia, Libya and Syria. At the same time, China is exerting more influence in Asia, in particular the South China Sea, stoking political tensions, noted Mr Wood. Terrorism continues to be an ever-present risk in many countries, although the nature of its threat is changing, he added. The capability to carry out terrorist attacks in the west has been diminished in recent years by counter terrorism measures. While the threat to western countries has reduced as established and emergent Islamist extremist groups focus closer to home, western companies and personnel worldwide remain key targets. In Sub Saharan Africa the risk of cross-border conflict and military coups has reduced in recent years. However, a high level of security risk exists in some countries, such as Kenya and Nigeria. Security threats in north Africa and the Middle East have also risen following the Arab Spring. In particular the civil war in Syria has destabilised the neighbouring countries of Iraq and Lebanon, according to Mr Wood. Political and security risks associated with the Arab Spring are not likely to improve in the coming year, he added.

Emerging markets face increased political risk in 2014

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