Populism, terrorism converge to compound global risks

Political risk
AON says that populism and protectionist risks in developed economies could lead to an increase in political risk in emerging and frontier markets as their resilience is challenged. While political risks remain high, particularly in the Middle East and Africa, reform efforts and past economic adjustment have increased resilience. Energy markets will continue to influence economic risks for many emerging and frontier markets. The expected stabilization in oil and gas prices will alleviate, but not erase, some economic pressures for producer nations, while amplifying financial vulnerabilities for importers, particularly in Asia.

Sarah Taylor, Executive Director, Head of Structured Credit and Political Risks, Aon Risk Solutions, said: “The changing global landscape, driven by trade protectionism, populist policies and sanctions, is likely to have a significant impact on emerging and frontier markets.  This makes it more important than ever for global businesses to understand and mitigate their exposures to political risk.”

Rachel Ziemba, Managing Director Emerging Markets, Roubini Global Economics, said: “In the wake of policy uncertainty in developed economies such as the US and Europe, major trading partners in Asia as well as commodity producers in Sub-Saharan Africa and the Middle East and North Africa seem most exposed. Given the focus on trade, currency and migration renegotiation, we are watching for increases in exchange transfer risk, supply chain disruption and government interference in the economy. Within these regions, we see meaningful differentiation, with the richer countries of the Gulf Cooperation Council outperforming regional peers.”

Key highlights from the 2017 report

• Oil and gas companies were the target of 41 percent of terrorist attacks on commercial interests in 2016 and the trend has continued in 2017. Nigeria and Colombia topped the list of countries affected by terrorism targeting the energy sector, with attacks by militants in the Niger Delta during the first half of 2016 causing Nigerian oil production to fall by 36 percent. Saudi Arabia, Iran, Russia, Venezuela and the U.S are vulnerable to production declines. As the global oil market slowly tightens, these supply shocks may have a more meaningful effect on price.
• Businesses are facing growing exposure to political violence risks worldwide. For the second successive year, more country risk ratings were increased (19) than decreased (11). The overall terrorism and political violence ratings are the highest they have been since 2013, capturing not only terrorism but also the risk of coups, civil and interstate conflicts and rebellions. There are now 17 countries at highest risk, representing epicenters of instability that emanate international terrorism threats and significantly increase business risk exposures in neighboring states. Three belts of severe risk run through Africa from the Mediterranean to the Atlantic, through the Levant and through South Asia.
• Open trading nations like Chile, Colombia, Hong Kong, Malaysia, Singapore and Taiwan are exposed to increased political risk due to dependence on U.S. and other trading partners. Mexico and the Philippines are more vulnerable to declines in remittances if they occur due to trade restrictions. Brazil, India, Indonesia and Nigeria are more resilient due to large domestic economies, which are less reliant on exports.
• The Middle East and North Africa has the most dense concentration of high to severe risk countries in the world, with heightened political risk and elevated levels of political violence (for example, in Iraq, Syria, Yemen and Libya) spilling over to neighbors and undermining trade and tourism. Territorial losses for IS in Iraq and Syria will probably lead to a dispersion of the jihadist network, carrying serious threats implications for dozens of countries across the region and beyond, particular in Europe and Asia. The richer countries of the GCC remain much more resilient to political shocks, but economic vulnerabilities including government arrears to the private sector and higher cost of capital remain present.

The Aon Political Risk Map captures changing risks for businesses and countries across emerging and frontier markets (non OECD countries). The map is produced in conjunction with Roubini Global Economics and 2017 marks its twentieth anniversary. Roubini Global Economics is an independent, global macroeconomic research firm.

The Aon Terrorism and Political Violence map offers detailed represents empirical and intelligence-based assessments on terrorism threats and political violence risks. The map has been produced in conjunction with The Risk Advisory Group since 2007.