What are the political trends that will shape markets in 2014? The Political Monitor risk outlook pack takes a look.

1. Political risk outlook - February 2014
February 2014
www.politicalmonitor.com.au

2. OUTLINE
This presentation provides a summary of Political Monitor‟s monthly Risk
Outlook report. It includes Political Monitor‟s proprietary risk scores and indices
including the Asia Political Risk Index.
To find out more about subscribing to the monthly pack please contact:
Damian Karmelich
Partner – Sydney
p. 0407 772 548
e. karmelichd@politicalmonitor.com,au
Steve Cusworth
Partner - Melbourne
p. 0417 178 697
e. cusworths@politicalmonitor.com.au
Political risk outlook
February 2014

3. CONTENTS
•
Global outlook …………………………………………………………………….. p. 4
•
Asia Political Risk Index …………………………………………………………. p. 6
•
Key influencing factors …………………………………………………. p .7
•
Country in focus: Indonesia ……………………………………………………... p. 8
•
Latest reports ………………....…………………………………………………... p. 9
•
Appendix 1 ………………………………………………………………………… p. 12
Political risk outlook
February 2014

4. GLOBAL OUTLOOK
•
Elections are set to shape markets in 2014 as some of the world‟s most important
economies go to the polls. Politicians in the United States, European Union, Brazil,
South Africa and Indonesia will all face voters.
•
The US debt ceiling debate is cloaked in the politics of the Congressional mid-term
elections and the battle for the soul of the Republican party between moderates and
Tea Party radicals.
•
Likewise Senate Majority Leader Harry Reid‟s (D) opposition to fast track approval for
trade deals is a play to the Democratic base of labour unions and a sign that the
Trans-Pacific Partnership agreement will not pass through Congress easily.
•
The flight of hot money from emerging markets in response to a wind down of
quantitative easing has revealed the institutional weakness within many of these
countries and the extent of political risk in these markets.
Political risk outlook
February 2014

5. GLOBAL OUTLOOK
•
Argentina, Brazil, South Africa & Turkey all suffer from systemic weaknesses including
an executive that confuses their own political interests with that of the country, a
trampling of judicial independence, corruption and a political process dominated by
one major party.
•
The pummeling of emerging market currencies will have a dire effect on living
standards.
•
In many countries this will be exacerbated by weak commodity prices and the
resultant hit to government revenue making it harder for regimes to paper over latent
social inequality and spend their way out of crisis.
•
Political turmoil across emerging markets will continue to rise over the coming weeks
and months.
Political risk outlook
February 2014

6. ASIA POLITICAL RISK INDEX - risk of turmoil high in some of
the region‟s most important economies
Political risk outlook
February 2014

7. ASIA POLITICAL RISK INDEX – Key influencing factors
•
Countries rated VERY HIGH or EXTREME share a number of characteristics including
– high levels of corruption, large proportion of population under the age of 30 and high
youth unemployment, a large proportion of household budgets spent on foodstuffs and
low levels of investment from domestic firms.
•
Furthermore, VERY HIGH and EXTREME risk countries have limited outlets for
political discourse pushing dissent underground where it is difficult to track but prone
to rapid escalation with little notice.
•
The recent flight of money out of emerging markets will further expose the underlying
institutional weakness of a number of VERY HIGH and EXTREME risk countries.
•
A number of VERY HIGH and EXTREME risk countries share characteristics with
those Arab countries that experienced turmoil during the „Arab Spring‟.
•
A number of MODERATE and LOW risk countries confront significant economic
challenges but are less exposed to political volatility and / or social turmoil.
Political risk outlook
February 2014

8. COUNTRY IN FOCUS - Indonesia
•
Indonesia is currently rated a HIGH risk with a
score of 55 out of 100 on the Political Monitor Asia Political Risk Index.
•
Presidential and parliamentary elections in 2014 limit the scope for economic reform
and a sustained battle against corruption and rising social inequality.
•
Election season is also contributing to a rise in populism and economic nationalism.
Recent bans on the export of unprocessed mineral ores, foreign ownership
restrictions for banks and import tariffs all play to a domestic audience in an election
year.
•
Ethnic and religious tensions continue to simmer in the regions. While the government
has subdued terrorist groups underlying issues such as youth unemployment and
rising inequality remain fertile hunting grounds for extremists.
•
While Jakarta Governor Joko Widodo is emerging as a firm favourite for the
presidency Indonesia‟s geographic, ethnic and religious diversity ensures no party can
acquire a majority in the parliament sentencing the country to more years of coalition
rule.
Political risk outlook
February 2014

9. LATEST REPORTS
Lower prices set to change politics of foreign investment
The hit to national income from lower commodity prices is likely to force a
dramatic re-think of Australians‟ attitude towards foreign ownership.
The competition agenda – a return to incentives
The Abbott Government‟s „root and branch‟ review of competition policy
offers the prospect of a return to the productivity-fuelled growth of the
1990s. Yet of most importance will be the underlying shift from a focus on
enabling to a focus on incentives.
Shanghai Free Trade Zone – opportunities & risks
The Shanghai Free Trade Zone offers opportunities and pitfalls for firms.
Understanding the rules and the longer term plan is the key to success.
Political risk outlook
February 2014

10. Detailed analysis on these and other political risks confronting investors can be
found at www.politicalmonitor.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
February 2014

11. DISCLAIMER & COPYRIGHT
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Political risk outlook
February 2014

12. APPENDIX 1 - ASIA POLITICAL RISK INDEX METHODOLOGY
The Political Monitor Asia Political Risk Index tracks nine key variables that go
to the core of political risk in a country. The variables provide an indication of
economic and social inequality, particularly among key demographics, and the
risk of political and social turmoil. Those variables include the level of youth
unemployment, corruption, elasticity of demand for food, the percentage of the
population living below the poverty line, and the proportion of foreign debt to
Gross National Income (GNI).
The index provides a relative score for each country. Accordingly, a low
(particularly negative) raw score signals lower relative risk while a high raw
score signals higher relative risk. Scores have then been scaled from 0 – 100.
A score of 50 signals average risk relative to other countries.
Political risk outlook
February 2014