The Political Monitor August political risk outlook investment pack includes the Australian Political Risk Index, political risk spreads, country risk analysis for China, India and Indonesia, an examination of geo-political events on oil prices and a review of political risk across Africa.
2. OUTLINE!
This presentation provides a summary of Political Monitor’s monthly Political risk outlook
– investment pack. It includes Political Monitor’s proprietary risk scores and indices and
domestic, regional and global analysis of the commercial implications of political trends
and events. !
The full pack is released to subscribers at the beginning of each month and this summary
version is released for general distribution a minimum of one week later.!
To find out more about subscribing to the full monthly pack please contact:!
!
Damian Karmelich ! ! ! ! ! ! !Steve Cusworth!
Partner – Sydney ! ! ! ! ! ! !Partner - Melbourne!
p. 0407 772 548 ! ! ! ! ! ! !p. 0417 178 697!
e. karmelichd@politicalmonitor.com.au ! ! !e. cusworths@politicalmonitor.com.au !
3. CONTENTS!
• Australian Political Risk Outlook …………………………………………………………… p. 4!
• Asia Political Risk Outlook ………………………………………………………………….. p. 7!
• Country in focus: China …..……….…… ……..….………..… ……...….……... p. 8!
• Country in focus: India ……………………………………………………………. p. 9!
• Country in focus: Indonesia …………….…… ……..….………..… …………... p. 10!
• Global issues ………………………………..………………………….….……………..….. p. 11!
• Appendix 1 – Australian Political Risk Index methodology…….……………...……..….. p. 17!
• Appendix 2 – Political risk spread methodology ……………………………………..…… p. 18!
• Appendix 2 - Economic & investment impact of political and social instability ……..… p. 19!
!
! ! ! !!
!
Political risk outlook! 3!
5. AUSTRALIAN POLITICAL RISK INDEX – domestic & global
events pushed the index to its second highest level in 10 months!
Political risk outlook! 5!
0
2
4
6
8
10
12
14
16
18
Poli%cal
Uncertainty
Score
Poli%cal
Risk
Index
6. AUSTRALIAN POLITICAL RISK INDEX – domestic & global
events pushed the index to its second highest level in 10 months!
Political risk outlook! 6!
• Debate
over
the
carbon
tax
and
uncertainty
about
the
detail
of
the
AbboF
Government’s
‘Direct
Ac%on’
policy
helped
push
the
poli%cal
risk
index
to
its
second
highest
level
in
10
months.
• Adding
to
the
high
level
of
uncertainty
and
underlying
vola%lity
were
the
failure
of
the
Government
to
garner
support
for
key
components
of
its
budget
and
the
growing
realisa%on
by
markets
that
Clive
Palmer
and
his
Palmer
United
Party
(PUP)
were
increasingly
willing
to
use
their
balance
of
power
in
the
Senate
to
frustrate
government
legisla%on
in
pursuit
of
their
own
objec%ves.
Whether
by
design
or
lack
of
experience
the
new
Senators
have
created
a
sense
of
confusion
around
the
future
of
key
pieces
of
government
legisla%on.
• Geo-‐poli%cal
events
also
weighed
on
the
index
with
uncertainty
growing
about
the
long-‐term
implica%ons
of
Western
sanc%ons
against
Russia,
the
impact
of
the
ongoing
turmoil
in
Ukraine
on
global
energy
supplies
and
prices,
and
events
in
the
Middle
East
threatening
to
preoccupy
if
not
engulf
key
actors
in
the
Middle
East.
• The
failure
of
Western
powers
and
Iran
to
make
substan%al
progress
in
nuclear
nego%a%ons
has
also
been
noted
by
markets
as
companies
around
the
world
wait
to
see
whether
a
sizeable
new
market
will
be
further
opened
to
the
world
or
will
once
again
be
confronted
by
economy
destroying
sanc%ons.
• Narendra
Modi’s
failure
to
move
as
far
or
fast
on
economic
reform
as
many
had
hoped
and
uncertainty
about
the
outcome
of
the
presiden%al
elec%on
in
Indonesia
have
also
added
to
poli%cal
uncertainty
in
Australia
and
the
surrounding
region.
8. COUNTRY
IN
FOCUS:
CHINA
–
ANTI-‐CORRUPTION
CAMPAIGN
SIGNALS
END
OF
CONSENSUS
LEADERSHIP
• President
Xi
Jinping’s
an%-‐corrup%on
drive
is
largely
targeted
at
fac%onal
opponents
and
their
supporters
and
is
the
most
aggressive
campaign
of
its
kind
in
20
years.
• Markets
have
been
slow
to
understand
the
import
of
this
campaign
and
the
implica%ons
for
the
poli%cal
dynamic
in
the
world’s
second
largest
economy.
• The
an%-‐corrup%on
drive
is
also
an
aFempt
to
address
one
of
the
primary
concerns
of
the
public,
par%cularly
with
regard
to
local
officials,
and
illustrate
the
new
leadership’s
affinity
with
the
concerns
of
ordinary
people.
• The
latest
campaign
comes
as
slowing
growth
increases
the
pressure
on
government
to
address
income
inequality
and
minimise
job
losses
in
the
transi%on
from
an
investment
driven
to
consumer
focused
economy.
Political risk outlook! 8!
30
35
40
45
50
55
60
2/04/2014
2/05/2014
2/06/2014
2/07/2014
China
poli%cal
risk
spread
9. COUNTRY
IN
FOCUS:
INDIA
–
MARKETS
LOOKING
FOR
MORE
THAN
CHANGE
OF
GOVERNMENT
• While
India’s
risk
spread
has
narrowed
slightly
over
recent
weeks
investors
remain
concerned
about
poli%cal
risk
in
the
country.
• New
Prime
Minister
Narendra
Modi
has
failed
to
meet
early
expecta%ons
of
far-‐reaching
economic
reforms
and
instead
has
signaled
he
is
likely
to
take
a
slower
approach.
• A
number
of
trade
deals,
including
the
Doha
round,
are
at
risk
as
the
new
government
appears
reluctant
to
expose
India’s
agricultural
sector
to
extensive
liberalisa%on.
• A
failure
to
tackle
a
number
of
economic
challenges
will
likely
result
in
a
further
widening
of
India’s
poli%cal
risk
spread
as
growing
discontent
among
the
country’s
youth
exposes
India
to
the
risk
of
social
upheaval.
Political risk outlook! 9!
170
175
180
185
190
195
2/04/2014
2/05/2014
2/06/2014
2/07/2014
India
poli%cal
risk
spread
57.5
58.5
59.5
60.5
61.5
62.5
63.5
USD
:
INR
10. COUNTRY
IN
FOCUS:
INDONESIA
–
MARKETS
GROW
WARY
OF
UNCERTAIN
ELECTORAL
OUTCOME
• Uncertainty
surrounding
the
outcome
of
the
presiden%al
elec%on
contributed
to
a
widening
poli%cal
risk
spread
over
recent
weeks.
• While
Joko
Widodo’s
victory
now
appears
assured
there
remains
concern
about
the
new
President’s
ability
to
command
a
governing
majority
in
the
Parliament
where
he
will
be
dependent
upon
a
coali%on
of
par%es
to
deliver
legisla%ve
outcomes.
• The
outcome
of
the
parliamentary
elec%on
is
a
reminder
of
Indonesia’s
fractured
poli%cs.
The
country
is
already
experiencing
high
levels
of
economic
na%onalism
and
Widodo’s
populist
approach
may
add
to
exis%ng
poli%cal
risks.
• Investors
will
need
to
monitor
events
closely
as
Widodo
seeks
to
balance
the
compe%ng
interests
of
interna%onal
investors
and
his
domes%c
cons%tuency.
His
task
will
be
made
more
difficult
by
the
need
to
confront
bureaucra%c
corrup%on
across
the
country.
Political risk outlook! 10!
145
150
155
160
165
170
175
2/04/2014
2/05/2014
2/06/2014
2/07/2014
Indonesia
poli%cal
risk
spread
10000
10500
11000
11500
12000
12500
2013-‐08-‐01
2013-‐09-‐01
2013-‐10-‐01
2013-‐11-‐01
2013-‐12-‐01
2014-‐01-‐01
2014-‐02-‐01
2014-‐03-‐01
2014-‐04-‐01
2014-‐05-‐01
2014-‐06-‐01
2014-‐07-‐01
2014-‐08-‐01
USD
:
IDR
12. THE
POLITICS
OF
OIL
–
MARKETS
CONFUSE
POLITICAL
EVENTS
WITH
POLITICAL
RISK
• Markets
ini%ally
reacted
nervously
to
events
in
Ukraine
and
the
Middle
East
with
fears
that
oil
prices
would
spike
in
response
to
geo-‐poli%cal
turmoil.
• However,
as
Poli%cal
Monitor
forecast
in
June
markets
were
responding
to
broad-‐based
geo-‐poli%cal
events
and
not
paying
close
enough
aFen%on
to
country
specific
events.
• Sanc%ons
against
Russia
are
unlikely
to
impact
its
oil
sales
nor
push
prices
higher
as
Europe
already
sources
large
volumes
from
elsewhere
and
much
of
Russia’s
oil
goes
to
countries
not
imposing
sanc%ons,
including
China.
• Elsewhere,
the
Israeli-‐Pales%nian
conflict
involves
two
non-‐oil
producing
groups
while
events
in
Iraq
are
yet
to
impact
its
oil
produc%on
although
aFempts
by
Kurdish
authori%es
to
sell
oil
direct
to
the
world
should
be
watched.
• Meanwhile,
growing
US
supply
con%nues
to
relieve
pressure
on
global
demand.
! ! ! !!
! Political risk outlook! 12!
85
90
95
100
105
110
115
120
Brent
crude
&
WTI
WTI
Brent
0
2
4
6
8
10
12
Brent
crude
-‐
WTI
spread
13. THE
BATTLE
FOR
AFRICA
–
AUSTRALIAN
INVESTMENT
ON
AN
INCREASINGLY
RISKY
CONTINENT
• Australia
has
considerable
exposure
to
Africa.
• In
the
mining
sector
there
is
around
200
Australian
companies
involved
in
over
700
projects
across
37
African
countries.
• One
in
20
Australian
companies
listed
on
the
Australian
Securi%es
Exchange
(ASX)
has
an
investment
in
Africa,
and
Africa
hosts
the
largest
number
of
Australian
mining
projects
in
any
region
outside
Australia,
at
around
40%
of
all
overseas
mining
projects.
• Furthermore,
Australian
FDI
in
Africa
has
grown
75
percent
since
2006.
• But
poli%cal
risks
are
on
the
rise
resul%ng
in
increasing
conflict
across
the
con%nent.
!
!
Political risk outlook! 13!
14. THE
BATTLE
FOR
AFRICA
–
AUSTRALIAN
INVESTMENT
ON
AN
INCREASINGLY
RISKY
CONTINENT
• The
increase
in
conflict
and
the
risk
to
investors
is
a
consequence
of
four
broad
poli%cal
trends.
• Extremism
–
the
return
of
extremist
groups
waging
war
and
engaging
in
terrorism
have
hit
at
the
heart
of
some
of
Africa’s
most
important
economies
including
Kenya
and
Nigeria.
• Weak
borders
–
have
facilitated
the
easy
movement
of
extremist
groups
and
weapons.
The
aFack
on
a
Kenyan
shopping
mall
in
2013
was
commiFed
by
groups
based
in
Somalia.
• Inter-‐state
&
ethnic
conflict
–
is
retarding
the
growth
of
a
number
of
economies
including
oil
rich
South
Sudan.
• Weak
governance
–
allows
rampant
corrup%on,
which
adds
to
social
discord
in
a
region
where
70%
of
the
popula%on
live
on
less
than
$2
per
day.
This
also
retards
the
growth
of
an
emerging
middle
class.
!
!
Political risk outlook! 14!
15. Detailed analysis on these and other political risks confronting investors can be found at
www.politicalmonitor.com.au!
!
To find out more contact:!
!
Damian
Karmelich
Steve
Cusworth
Partner
-‐
Sydney
Partner
-‐
Melbourne
p.
0407
772
548
p.
0417
178
697
e.
karmelichd@poli%calmonitor.com,au
e.
cusworths@poli%calmonitor.com.au!
!
About Political Monitor!
Political Monitor is a political risk research and advisory firm. Our analysis provides
insight into the implications of political risk for commercial valuations, asset selection,
investment decisions, strategic planning and operational decisions. !
!
Political risk outlook! 15!
17. APPENDIX
1
-‐
AUSTRALIAN
POLITICAL
RISK
INDEX
METHODOLOGY
The
Poli%cal
Monitor
Australian
Poli2cal
Risk
Index
is
a
dynamic
index
that
tracks
the
level
of
policy
uncertainty
in
Australia
relying
on
a
number
of
variables
including
market
vola%lity
and
the
dispersion
of
private
sector
economic
forecasts.
The
index
is
refreshed
daily
providing
an
up
to
date
gauge
of
poli%cal
and
policy
uncertainty.
!
!
!
!
!
Political risk outlook! 17!
18. APPENDIX
2
–
POLITICAL
RISK
SPREADS
• The
Poli%cal
Monitor
poli%cal
risk
spread
is
a
proprietary
score
that
quan%fies
the
component
of
a
country’s
sovereign
risk
spread
(the
difference
between
yields
on
10
year
US
Treasuries
and
comparable
debt
in
respec%ve
countries)
aFributable
to
poli%cal
factors
such
as
stability
of
government,
judicial
independence,
corrup%on,
poverty
levels,
food
security
and
a
range
of
demographic
factors
such
as
the
size
of
the
popula%on
under
the
age
of
30.
• The
poli%cal
risk
spread
allows
investors
to
make
a
clearer
dis%nc%on
between
the
different
types
of
risk
that
influence
sovereign
yields.
This
approach
means
investors
can
dis%nguish
between
poli%cal
risks
and
more
general
economic
risks
when
assessing
country
specific
investments.
• The
scores
are
refreshed
daily
for
countries
where
publicly
available
data
on
bond
yields
are
available.
They
are
general
in
nature
and
do
not
take
into
account
the
capacity
of
individual
firms
to
manage
and
mi%gate
poli%cal
risk
in
each
market.
• Poli%cal
Monitor
provides
poli%cal
risk
spreads
for
15
na%ons
across
Asia
and
7
in
which
Australia’s
major
mining
companies
have
opera%ons.
! ! ! !!
!
Political risk outlook! 18!
19. APPENDIX
3
-‐
ECONOMIC
&
INVESTMENT
IMPACT
OF
POLITICAL
&
SOCIAL
INSTABILITY
–
DOES
IT
MATTER?
• Poli%cal
risk
is
the
second
ranked
concern
for
publicly
traded
companies
…
"Looking
ahead,
investors
con%nue
to
be
wary
about
the
effects
of
systemic
risk,
poli%cs
and
regula%on
on
the
world's
markets
and
how
they'll
perform.”
(BNY
Mellon,
Global
Trends
in
Investor
Rela2ons,
2014).
• In
general
poli%cal
instability
results
in:
• (a)
lower
economic
growth
(Aisen
&
Veiga,
2013)
• (b)
reduced
private
sector
investment
(Alesina
&
PeroK)
• (c)
increased
infla%on
levels
&
vola%lity
(Aisen
&
Veiga,
2008).
• The
economic
effects
of
poli%cal
&
social
instability
remain
for
an
observable
period
of
2
–
3
years.
The
key
determinant
of
whether
the
effect
of
instability
ceases
at
that
point
is
the
speed
with
which
countries
implement
reforms
&
improve
governance
(Bernal-‐Verdugo,
Furceri
&
Guillaume,
IMF
Working
Paper,
2013).
• An
increase
in
economic
policy
uncertainty
foreshadows
a
decline
in
economic
growth
and
employment
in
the
following
months
(Baker,
Bloom
&
Davis,
EPU).
• The
Interna%onal
Monetary
Fund
(IMF)
es%mates
the
economic
loss
to
Libya,
Egypt,
Tunisia,
Syria,
Yemen,
and
Bahrain
in
2011
at
USD$20.56
billion
as
a
result
of
poli%cal
and
social
conflict.
!
! ! ! !! Political risk outlook! 19!