The knock-on effects of the financial crisis and the deepest global recession in decades continue to be felt across the world, causing political risks to increase in 2010.
That’s the message from Aon at the launch of this year’s edition of its Political Risk Map, which offers a snapshot of the political risk climate across the globe.
Downgraded
There were twice as many countries downgraded in terms of political stability than were upgraded, with 18 countries deemed to show higher levels of political risk than they did in 2009. “The global financial crisis of late 2008 and early 2009 continues to manifest itself in increased levels of political instability. The initial impact has shifted from being an economic problem to being a political problem,” said Miles Johnstone, a Director of Aon’s political risk team.
The impact of the economic downturn on the global political climate was also highlighted in last year’s Lloyd’s 360° Risk Insight report “Global Recession: The Magnifying Glass for Political Instability”.
2010 is likely to witness an increasing risk of non-payment of sovereign debt, exchange transfer restrictions and rising political interference as a result of the growing fallout from the economic crisis, said Aon.
Latvia was one of those countries downgraded as it struggles to come to terms with a deep recession triggered by the global financial meltdown. Last year there were riots in its capital Riga in protest at the worsening economic crisis, which is set to cause the country’s GDP to shrink 18% this year. Its coalition government is under increasing strain as it pushes through biting austerity measures to slash its budget deficit while it tries to negotiate a 7.5 billion euro rescue package led by the International Monetary Fund.
Ukraine and Ghana have been downgraded as a result of rising political and credit risk claims to the international insurance market.
Defaulted debt
In Ghana, state-owned oil refineries defaulted on around $600 million of debt repayments in 2008, much of it relating to payment obligations to international banks, oil traders and multinational oil firms. There were further defaults in 2009 and these repayment problems have led to claims notifications to insurers, which are likely to result in payments running into tens of millions of dollars.
Yemen has also been downgraded, partly as a result of a stream of claims from damage to foreign-owned assets in the north of the country due to political violence. “We expect there to be more as the country risks deteriorate further this year,” said Johnstone.
Food and water insecurity will also present a growing risk to the political stability of a number of countries, Aon said. In 2008, riots flared in cities across the world as rice and corn supplies ran low and similar unrest may return in 2010.
Aon named 30 countries it considers to be most vulnerable to food and water insecurity risks. They are mostly African countries, led by Mauritania, whose ability to grow their own food will be threatened by the effect of climate change and whose developing economies will mean they cannot afford to buy the additional food they need to feed themselves.
Upgraded
Nine countries were upgraded in this year’s edition of the map. Albania’s rating improved as a result of its concerted effort to fight crime and corruption as it attempts to meet the criteria for membership of the European Union. Sri Lanka and Colombia were upgraded on account of their improved internal security situations.
Vietnam’s strong economic performance over the past year, one of the best in Asia, was also rewarded with an upgrade.
