Heightened political risk hits the Brics

The findings were unveiled in the insurance broker's 2014 Political Risk Map that tracks political risk in emerging markets. The results showed an increased risk rating for all five countries that comprise the Brics (Brazil, Russia, India, China and South Africa). Brazil, which hosts the World Cup this year and the Olympics in 2016, has seen a moderate increase in political risk due to the level of state intervention in the economy. Meanwhile, Russia has seen its rating downgraded as a result of recent events in Ukraine. "Political strains and focus on geopolitical issues have exacerbated an already weak operating environment for business and exchange transfer risk has increased following the risk of new capital controls," said Aon.hideTerritorial disputes and regional ethnic conflicts, along with ongoing corruption and political interference have led to downgrading of India's risk rating. In China, which has been downgraded to 'moderately high', a slowdown in economic growth and a rise in political violence were described by Aon as 'mutually reinforcing'. The latest country to be added to the Brics acronym, South Africa, has seen its rating downgraded due to recurrent strikes that weaken the outlook for business and raise financing costs. The Aon political risk map, which covers 163 emerging market countries, features six upgrades and 16 downgrades. Of these downgrades, Eritrea moved from high to very high, while three (Moldova, Swaziland and Ukraine) all moved from medium high to high. Another three (China, Jordan and Russia) moved from medium to medium high. The highest number of downgrades occurred between the medium low to medium categories, where eight countries featured (Brazil, India, Kiribati, Samoa, South Africa, Tonga, Tuvalu, Vanuato). Of the six upgrades, Haiti moved from very high to high while another five (Ghana, Lao PDR, Philippines, Suriname and Uganda) moved from high to medium high. Aon has introduced a number of changes to its political risk map that reflect the fragile nature of the global economy, the continuing aftermath of the financial crisis and the various governmental efforts to recover from a deep recession. These changes include three new categories-banking sector vulnerability, risk to doing business and risk to fiscal stimulus. The risk map also includes an average of insurance premiums and the probability of default of sovereign payments, as well as economic commentary and country insights from Roubini Global Economics (RGE). According to RGE, international businesses should plan for three key political risks that are likely to increase in 2014. One of these is the heavy global election cycle that could lead to political violence and more state intervention. The first major election will take place in India. The remaining two trends are the risk of sovereign non-payment and exchange transfer risk, whereby a company is unable to make hard currency payments as a result of local currency controls. These concerns have risen because of improved economic conditions in more established markets that have made it harder to raise capital in emerging markets, said RGE. Meanwhile, weakening fiscal balances and foreign exchange pressures will likely lead to more sovereign defaults. The events in Ukraine show that the political risk map works, said Mike Liu, Director of Country Insights and EM Equity Strategy, RGE. "We identified the economic imbalances and the political divide between east and west Ukraine and we downgraded the Ukraine to high risk status in Q3 2013." Ukraine was then downgraded a further two notches prior to the removal of the government and the annexation of Crimea. The pressure from Russia to federalise parts of the Ukraine will continue to raise risk for corporates operating in the region. The ongoing conflict has also raised risk in Russia. The possibility of economic sanctions raises risk in terms of exchange transfer, supply chain and banking sector and liquidity. For investors in Russia possible exposures are in three main areas-energy, agriculture and economics, said Mr Liu. For example, Italy is a big importer of Russian gas and Austria, Sweden and France have a high exposure to the Russian banking and investment sector. One of the biggest threats though is in the agricultural sector. Ukraine is often referred to as the breadbasket of Europe. Russia and the Ukraine are two of the biggest producers and exporters of grain. "The imposition of sanctions or trade embargoes could see a 50% rise in the price of grain and a huge rise in supply chain disruption, especially in Europe and MENA which are the biggest consumers of Russian and Ukrainian grain," said Mr Liu.

Heightened political risk hits the Brics

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