Photo by: Bloomberg
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, Aon Risk Solutions’ 2015 Political Risk Map revealed this week.
Closer to home, the report, which portrayed political risk in 163 emerging markets, found that sub-Saharan Africa continued to record the largest number of downgrades in 2015, as economic and political risks grew.
However, the picture remained mixed across the region, with improvements in Southern African countries offset by other weaknesses in parts of West Africa.
Aon sub-Sahara Africa regional controller Darlington Munhuwani added that the Ebola virus outbreak had exacerbated an already challenging business environment in afflicted countries such as Guinea, Liberia and Sierra Leone.
“Institutional quality and the risk of supply chain disruption was already high in these countries and the epidemic has worsened these vulnerabilities and put extreme pressure on local health systems and tested national governments’ ability to mobilise resources in response to these challenges.
“Although the epidemic seems to have peaked and been contained to these countries, the damage on institutions will be long-lasting,” he commented.
Islamic extremism, largely represented by groups such as Boko Haram and al-Shabaab, would continue to increase political risk in Nigeria and Somalia, as well as in neighbouring countries Cameroon, Kenya and Uganda, the risk map affirmed.
“As a result, political violence risk will remain high throughout this year in these countries, even if these attacks are not prevalent throughout each of these countries.
“Investors in the regions will need to assess their risks directly,” said Munhuwani.
In Nigeria, the threat of Boko Haram had already forced the government to invest more in military and security efforts rather than in public development, he added.
Meanwhile, lower commodity prices would see political risks remain high and economic risks increasing in regional commodity-producing nations.
In particular, Angola, Cameroon, the Democratic Republic of Congo and Nigeria would have to adjust to “much” weaker revenue outlooks, which implied cuts to spending, especially public investment.
“Nigeria’s government will face a very difficult fiscal position, and the new administration will have little space to stimulate growth once elections finally take place,” asserted Munhuwani.
In Ghana, broad-based deterioration in the country’s economic and political environment posed a threat to investors, as did its higher sovereign nonpayment risk.
Ghana’s negotiations with the International Monetary Fund were also expected to be difficult, given the government’s reluctance to conduct fiscal or structural reforms and its perceived lack of transparency on policy priorities.
The map also revealed that it would be a particularly challenging year for oil producers in the Middle East and Africa, several of which already had high or very high country risk ratings.
Egypt, Tunisia and Morocco, which should otherwise stand to benefit from cheaper oil imports, faced increased security risks owing to the “power vacuums” in Iraq, Libya and Syria.
Munhuwani believed the political risk map could help organisations assess risks and factor them into their emerging markets investment strategies.
“Businesses need to constantly monitor their exposure to these risks and the interplay of economic uncertainty and sociopolitical instability,” he advised.