Oil prices and elections dominate African risks

Aon has just unveiled its 2015 Political Risk Map, which portrays political risk in emerging markets. Topping the list of political risks facing emerging market investors is the increasing instability in already fragile oil-producing countries such as Iran, Iraq, Libya, Russia and Venezuela, as a consequence of the low oil price. The effectiveness of extremist groups in Africa and the Middle East will be amplified in afflicted countries that lack the resilience to absorb economic shocks. The map illustrates that 2015 will be a particularly challenging year for oil producers in Africa, several of which already have high or very high country risk ratings. Egypt, Tunisia and Morocco, which should otherwise stand to benefit from cheaper oil imports, face increased security risks because of power vacuums in Iraq, Libya and Syria. Matthew Shires, Head of Political Risk at Aon, said: “By using the latest data and analytics, the political risk map helps organisations determine their emerging market investment strategies. Businesses need to constantly monitor their exposure to political risk, such as the impact of oil price uncertainty and political instability.”hidePaul Domjan, Managing Director, Roubini Country Insights, added: “Roubini Global Economics (RGE) is proud to continue its partnership with Aon for its clients. During 2014, political risks in the emerging markets rose, particularly in oil-exporting regions. “The quarterly updates to the risk icon scores and the country ratings highlight developing risk trends, allowing investors to respond quickly to deterioration and to better hedge their exposure or take advantage of new opportunities. Once again, the map demonstrates the power of combining RGE’s country analysis and benchmarking with Aon’s expertise in country risk.” Looking at Sub Saharan Africa in more detail, Aon said the Ebola outbreak exacerbated an already challenging business environment in the most afflicted countries (Guinea, Liberia and Sierra Leone). The report found: “Institutional quality and risk of supply chain disruption was already high in these countries and the epidemic has exacerbated these vulnerabilities and put extreme pressure on local health systems and governments. Although the epidemic seems to have peaked and been contained to these countries, the damage on institutions will be long-lasting.” Turning to Islamic extremism, Aon said groups such as Boko Haram and Al-Shabaab will continue to increase political risk in Nigeria and Somalia respectively, as well as their neighbours Cameroon, Kenya and Uganda. “As a result,” the report concluded, “political violence risk will remain high throughout 2015 in these countries, even if these attacks are not pervasive throughout the whole country. Investors in key regions will need to assess their risks directly. “In Nigeria, the threat of Boko Haram has already forced the government to invest more in military and security efforts rather than public investment. We expect these developments will continue to weaken public confidence in the government in Nigeria.” Looking at the impact of lower oil prices, Aon said oil producers face a challenging year in 2015, particularly north African exporters (Libya and Algeria), many of which already have high or very high country risk ratings, suggesting they are both exposed to shocks and lack resilience to cope with them. It said: “The oil shock will put domestic institutions under strain and possibly weaken the security environment in neighbouring oil importers like Egypt, Tunisia and Morocco, which would otherwise stand to benefit from cheaper oil prices and the support to consumption. “These ‘Arab countries in transition’ should, however, benefit from continued support from the International Monetary Fund and regional players, including investment. We are cautiously optimistic about some of the recent economic trends in Egypt but political violence risk remains high. [Without] a meaningful improvement in the security environment, Egypt’s overall country risk rating will remain high.” Meanwhile, IHS Energy Senior Energy Expert, Harriet Okwi, had a more positive note on east African countries. She said they are “expected to benefit from the weak crude oil price in terms of lower oil and gas import bills”. However, she warned, as elsewhere the current industry environment is expected to weigh on the frontier’s nascent exploration, development, licensing and merger and acquisition (M&A) activity and, with that, affect the landscape for above-ground risk. She said: “The sheer size of east African resources and potential further discoveries are a solid foundation for commercial viability and continued investment in development. However, reduced investor cashflows may prompt companies to retrench and delay pre-FID monetisation projects.” As exploration and production transactions typically dip in tandem with low crude oil prices, IHS Energy estimated vibrant east African M&A, in terms of both the deal count and transaction value, would likely slow down in the current industry conditions. However, some M&A activity during a cycle of low oil prices remains likely for strategic reasons as stronger market players take over weaker ones. Ms Okwi continued: “Exploration activity could decline in countries where the competitor mix is weighted towards companies without significant cashflow or recourse to borrowing; however, east African upstream retains an inherent attractiveness following the resource de-risking of recent years while lower oil field service costs may ensure continued investment by companies with healthy balance sheets.” She added: “For new exploration interest, licensing rounds without significant regulatory incentives or particular prospectives may see tepid response from investors. “In the short term, price volatility will likely impact east Africa’s already elevated above-ground risk profile, with implications for project planning and expenditure; however, sustained low oil prices through the long term may drive policy adjustments to improve fiscal and regulatory terms to attract exploration.”

Oil prices and elections dominate African risks

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