Risk calculators and dashboards
After a year of heightened global political unrest, a major new report – the Political Risk Atlas 2012, the fourth annual atlas released by risk analysis firm Maplecroft, has identified some of the most significant political risks for business and investors in 2012 and beyond.
According to Maplecroft’s analysis these include the risk of continuing instability in the Arab Spring countries, potential societal unrest and regime instability in Belarus, Guinea Bissau, Iran, Sudan, Turkmenistan and Viet Nam, as well as an increasing risk of resource nationalism in commodity producers with poor or inadequate levels of democratic governance, such as Angola, DR Congo, Guinea, Myanmar and Zimbabwe.
Maplecroft’s results also reveal decreased risk and greater opportunity in many of the world’s growth economies, including the BRIC and “Next Eleven” countries, particularly Mexico, Indonesia and the Philippines, and also in markets as Thailand, Liberia and Bolivia.
The Political Risk Atlas (PRA 2012) includes 45 risk indices and maps that have been developed by Maplecroft to identify and monitor the key issues affecting the investment climates of 197 countries. The Atlas analyses yearly trends relating to dynamic risks, which reflect change over a short period of time, including governance, political violence, the macroeconomic environment, and included this year for the first time, resource nationalism. It also includes structural risks which reflect change over a longer timeframe, including economic diversification, resource security, infrastructure quality, the resilience of society to challenges, and the risk of complicity in human rights violations committed by regimes and business partners.
The PRA 2012 also features a new Forced Regime Change Risk Index, assessing a regime’s vulnerability to the kind of social, economic and political forces that brought about the removal of rulers in MENA during 2011. Amongst the issues considered by the index are youth unemployment, food security, human rights violations by security forces, corruption, lack of political freedoms and the relationship between the civilian and the military establishment.
Political Risk (Dynamic) Index 2012
© Maplecroft, 2012
Key investment risks and opportunities identified by the Political Risk Atlas 2012 include:
- Reduced long and short-term risk profiles for BRIC and N11 countries, including: Indonesia, Mexico and the Philippines, signalling good investment potential
- Continuing instability in Arab Spring countries, with increased risk of unrest in Saudi Arabia and Sudan
- Elevated risk of political violence affecting oil and gas companies in the MENA region, including heightened terrorist activity and / or sabotage, especially in Algeria, Egypt, Libya and Morocco
- Potential risk of forced regime change in Bangladesh, Belarus, Equatorial Guinea, Guinea Bissau, Iran, Madagascar, Turkmenistan and Viet Nam deriving from a combination of political, social and economic conditions that reflect those seen in the Arab Spring countries
- A rising global trend for resource nationalism in hydrocarbon and mineral rich nations including Venezuela, Guinea, DR Congo, Russia, Bolivia and Nigeria
Continuing unrest forecast for Arab Spring countries
Of the ten states with the fastest increasing risk trends in Maplecroft’s Dynamic (short-term) Political Risk Index, nine are located in the Arab world, reflecting the political upheaval and unrest taking place in the region. These countries are: Algeria, Bahrain, Egypt, Kuwait, Libya, Morocco, Oman, Syria and Tunisia. The level of unrest and risk of political change may differ significantly between individual countries.
One of the key findings of the Atlas points to a relationship between countries that score poorly for regime stability, corruption and human rights and perform relatively well for digital inclusion, suggesting some discretionary income, relative levels of better education and increased opportunities for human rights reporting.
For instance, in Bahrain, Egypt, Libya, Syria and Tunisia, social media, such as Facebook and Twitter, have played a significant role during the Arab Spring, which saw different segments of society come together over a lack of political freedoms and social gains, endemic state-level corruption, police brutality and high living costs. Social unrest was also linked to a disenchanted youth frustrated with a lack of opportunity arising from unemployment levels as high as 40%. This combination of factors will continue to drive unrest – of varying intensity -- in these countries.
Saudi Arabia and Sudan next?
Other Arab states, including Sudan and Saudi Arabia, are also classified as ‘high risk’ due to underlying structural and dynamic risk factors that can drive societal unrest, including a lack of democracy, oppression and lack of human rights protections.
However, the regimes in both countries enjoy a number of buffers which help counteract the forces of instability.
Saudi Arabia, for instance, remains a largely conservative society, marked by the long-standing partnership between the Wahhabist clerical establishment and the ruling al-Saud family. Sudan meanwhile continues to witness internal and external pressures which arguably create a sense of solidarity around Omar al-Bashir’s government. Sudan’s population could also be regarded as suffering from a legacy of war fatigue, as the country has a recent history of civil war and is still involved in ongoing insurgencies in Darfur and its southern provinces, which may further mitigate the potential for unrest.
High security risks for oil and gas firms in MENA
Maplecroft’s analysis finds that the ongoing instability is also exposing business to heightened security risks, such as physical threats from conflict. These risks were vividly illustrated during the Libyan revolution when operations took place to evacuate oil company staff. The conflict in Syria has led to a loss of revenue for oil companies, while international sanctions have forced investors to withdraw.
“The risk posed to businesses by militants in countries that have been severely affected by the Arab Spring should not be ignored,” states Maplecroft Director Anthony Skinner. “There are particular concerns over al-Qaeda in the Islamic Maghreb, which has sought to exploit the turmoil in North Africa, while al-Qaeda in the Arabian Peninsula, has sought to take advantage of extreme instability in Yemen. Staff and assets of energy companies are considered legitimate targets by both groups.”
Potential geopolitical hotspots – risk exposures to investors increasing
According to Maplecroft, investors also need to be aware of other countries with characteristics that indicate a susceptibility to political instability. These include Belarus, Guinea Bissau, Iran, Madagascar, Turkmenistan and Viet Nam. This assessment reflects that these countries face a combination of risk factors which echo some risk features found in the Arab Spring countries and may potentially make them vulnerable to forced regime change.
Over the long-term, conditions in Viet Nam were identified as having a high potential for unrest and instability due to the country’s high rate of digital inclusion, which is matched by a highly authoritarian, one-party Communist state. Maplecroft states that the repressive nature of the political environment and a lack of labour protection may fuel instability. Strong digital penetration may encourage dissent, while persistent crackdowns on strikes and demonstrations and a stagnating economy could also trigger further discontent.
However, in the short and medium-term, the party’s hold on power seems secure, as it maintains firm control over the media and has successfully channelled public frustrations into this summer’s nationalistic demonstrations against China.
Decreased risk in growth economies – offers new investment opportunities
The majority of growth economies have witnessed a reduction in political risk across the board, with the BRICs and a number of N11 states – including Indonesia, Mexico and the Philippines – experiencing decreasing risk in both Maplecroft’s dynamic and structural risk measures. Counting as one of the key variables, strong growth and investment potential in these countries helps provide the conditions for greater human security and improved living standards and socio-economic development.
However, it is important to recognise that companies still face considerable risks in these growth economies. Seven of the N11 states, including Iran and Viet Nam, remain in the ‘high’ risk category in both the dynamic and structural risk indices for 2012. Responsible businesses must act to mitigate these risks whilst seizing the opportunities presented by these high-growth countries. How these governments address reform of both labour legislation and domestic spending policy will be important.
“In a time of unprecedented geopolitical turmoil, political risk analysis has become essential for investors,” states Jim O’Neill, Chairman of Goldman Sachs Asset Management and a Maplecroft investor. “Maplecroft’s annual evaluation of political risk not only identifies hotspots of instability, but shows investors which economies exhibit the hallmarks of future economic growth by revealing positive change over time. It appears that the BRIC economies might have turned the corner in that regard.”
Rising risks of resource nationalism for extractive companies – DR Congo, Guinea, Zimbabwe, Turkmenistan and Venezuela amongst those most at risk
Over the past year the price of many commodities, particularly minerals and metals, increased to record levels, heightening the incentive for resource-rich nations to take a greater share of profits from companies developing their natural reserves.
Potential actions by governments can include nationalising an entire industry. For example, in August 2011, Venezuela’s President Hugo Chavez announced his intention to nationalise the country’s gold industry. Likewise in Guinea in 2010, the state sought a renegotiation of contracts, saying it would become a minority shareholder in all mining contracts. Comparable events have occurred in 2011 in other parts of South America and Africa and are likely to be repeated, especially if a global economic slowdown begins to cut into government tax revenues.
The PRA2012 findings reveal the risk of such ‘resource nationalism’ occurring is highest in countries where the extractive sector makes up a large percentage of the country’s economic output.
Maplecroft’s resource nationalism hotspots include: DR Congo, South Sudan, Myanmar, Turkmenistan, Iran, Guinea, Zimbabwe, Venezuela, Iraq, Bolivia, Russia, Kazakhstan, Angola, Nigeria and Libya.
“Oil, gas and mining companies, should be aware of the political and regulatory challenges that they may face when investing in territories with a high risk of resource nationalism,” adds Skinner. “They could lose control or possession of assets, as well as individual property, or face higher taxes. This is likely to result in heavy financial costs affecting the economic viability of reserves.”
A webinar on the PRA 2012 will be held on 29th Feb 3pm GMT, 10am EST. Professor Alyson Warhurst, Founding CEO of Maplecroft will present the findings, analysis, methodology and outlook for business and investors in the growth economies. Register at email@example.com – please note that places are limited.
For more information visit the Political Risk Atlas 2012, which includes 45 indices and interactive maps, as well as analysis of the results.
Jason McGeown, Head of Communications
Tel: +44 (0)1225 420000
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