political risk outlook investment pack - march 2015
TRANSCRIPT
www.politicalmonitor.com.au
Political risk outlook – investment pack March 2015
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.
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
CONTENTS
• Australian Political Risk Outlook …………………………………………………………… p. 5
• State in focus: Queensland ……………………………………………………… p. 7
• Asia Political Risk Outlook ………………………………………………………………….. p. 9
• Country in focus: Indonesia …..……….…… ……..……....… ……...….……... p. 12
• Country in focus: Philippines ……………………………….…………………… p. 13
• Country in focus: Viet Nam …………….…… ……..….………..… …………... p. 14
• Global issues ………………………………..………………………….….……………..….. p. 15
• Appendix 1 – Australian Political Risk Index methodology…….……………...……..….. p. 21
• Appendix 2 – Political risk spread methodology ……………………………………..…… p. 22
• Appendix 2 - Economic & investment impact of political and social instability ……..… p. 23
Political risk outlook 3
AUSTRALIAN POLITICAL RISK OUTLOOK
AUSTRALIAN POLITICAL RISK INDEX – domestic & global
events pushed the index to its second highest level in 10 months
Political risk outlook 5
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Australian Political Risk IndexSource: Political Monitor
AUSTRALIAN POLITICAL RISK INDEX – domestic & global
events pushed the index to its second highest level in 10 months
Political risk outlook 6
• The political crisis surrounding Prime Minister Tony Abbott’s leadership has brought government business to a standstill and pushed the Australian Political Risk Index to a 10 month high.
• However, long before the prospect of a leadership challenge emerged the index was experiencing high levels of volatility as the Government’s failure to pass key legislation weighed on markets. In particular, ongoing controversy about renewable energy targets, higher education reforms and budget measures all added to concerns about Australia’s policy outlook.
• A change of government in Queensland – Australia’s third largest state – has also added to uncertainty as business tries to come to terms with the implications of Labor’s win. In addition to policy changes, the failure of the Conservative Government to remain in power despite a landslide victory just four years ago adds to the level of political uncertainty across Australia as the electorate proves to be increasingly volatile. Meanwhile, an election in Australia’s largest state of New South Wales (NSW) is due at the end of March.
• Global events are also having an influence on the index as an anti-austerity party comes to power in Greece refocusing investors attention on the challenges confronting the European Union (EU). Meanwhile, Russia continues to cast a shadow over markets as it shows no signs of easing its intrusion into the politics of its neighbours leaving the West with little choice but to consider additional economic sanctions against the Putin regime.
STATE IN FOCUS: QUEENSLAND – A NEW GOVERNMENT HIGHLIGHTS POLITICAL VOLATILITY SWEEPING THE NATION
• Queensland has entered a period of heightened
risk as markets grapple with the policy and
budgetary implications of Labor’s return to
power.
• Minority government, a relatively untested
leader and budget strains all suggest an
extended period of uncertainty for Queensland
businesses.
• Furthermore, the Labor caucus will have to deal
with the return of a number of former Ministers
swept out of office in the 2011 Newman
landslide who are likely to demand senior roles
in the new government, each with strong policy
preferences and some with leadership
aspirations. This will create tensions for the new
government.
Political risk outlook 7
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Total RiskScore
Budget Risk Policy Risk Stability Risk ReputationalRisk
State Political Risk Index - February 2015
NSW Vic Qld WA SA Tas
STATE IN FOCUS: QUEENSLAND – A NEW GOVERNMENT HIGHLIGHTS POLITICAL VOLATILITY SWEEPING THE NATION
• Queensland’s Budget risk remains elevated with strained finances and a new government opposed to
raising much needed cash through asset sales. This leaves the budget in a precarious position with little
room to invest in much needed infrastructure.
• Stability risk is very high with the new government failing to command a majority in the parliament and a
crop of inexperienced MPs taking senior leadership positions. Furthermore, the return of a number of MPs
who were Ministers in the former Bligh Government is likely to create leadership tensions.
• Reputational risk is very high with the only daily newspaper having campaigned heavily against the new
government and polls showing Labor having only a small margin for error before public dissatisfaction sets
in.
• As the new government beds down its operations and direction, it can be expected that a number of
indicators will come down from their very high/extreme levels in the near future, however the range of
challenges facing the new government will result in an elevated risk profile for some time ahead.
Political risk outlook 8
ASIA POLITICAL RISK OUTLOOK
ASIA POLITICAL RISK OUTLOOK – rising food prices are fueling tensions across the region
Political risk outlook 10
• Despite recent monthly declines in its food price index the United Nations Food and Agriculture Organization has recorded a sustained rise in food prices over the last 15 years.
• The rising price of food has been accompanied by growing inequality across the region, which have been a source of tension within many countries.
• Emerging markets generally suffer more from rising food prices as a larger proportion of household budgets are committed to foodstuffs.
• Rising food prices were a critical factor in the Arab spring uprisings, which brought thousands of residents to the streets angry at the failure of largely corrupt governments to respond quickly to the stress many households were feeling.
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1990199219941996199820002002200420062008201020122014
Annual Food Price IndicesUN Food & Agricultural Organisation
Food Price Index Meat Price Index
Dairy Price Index Cereals Price Index
Oils Price Index
ASIA POLITICAL RISK OUTLOOK – rising food prices are fueling tensions across the region
Political risk outlook 11
• Volatility adds to concerns as household budgets become more difficult to manage, particularly for low income earners.
• In a number of countries – including India and Indonesia – food and fuel subsidies are being removed as part of broader efforts to reduce pressure on government budgets and tackle corruption.
• While over the long term these reforms are likely to benefit the economy and allow government to better target support programs to low income households there is considerable community disquiet about the removal of subsidies threatening the electoral prospects of a number of governments.
• However, these tensions may ease if the recent decline in commodity prices continue.
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Domestic food price volatility index(Food & Agriculture Organisation, United Nations)
Eastern Asia Southern Asia South-Eastern Asia
COUNTRY IN FOCUS: INDONESIA – ECONOMIC GAINS BALANCE AGAINST POLITICAL CHALLENGES
• Markets are impressed with President Joko
Widodo’s willingness to push ahead with key
reforms such as winding back fuel subsidies and
tackling corruption. These have been major factors
in the narrowing of Indonesia’s political risk spread.
However, a number of significant political
challenges remain.
• Widodo’s lack of a parliamentary majority remains a
major obstacle to his reform agenda. His
parliamentary weakness makes him more
dependent upon old-guard elements of his own
party for whom combatting corruption is not a
priority and economic reform takes a back seat to
electoral populism.
• The battle between the reform minded Widodo and
old-guard Indonesian politicians will define his
presidency throughout 2015 as both voters and
markets seek to determine whether the President
can turn his best intent into concrete political
outcomes.
Political risk outlook 12
145
155
165
175
185
195
Indonesia political risk spread
114001160011800120001220012400126001280013000
USD : IDR
COUNTRY IN FOCUS: PHILIPPINES – OUTLOOK WEAKENS AS SOCIAL COHESION FRAYS• The Philippines political risk spread has widened to its
highest level in 12 months as social and political
instability in the south continues to be a source of
national tension and President Aquino faces calls for him
to resign.
• A failed attempt by police forces to capture two terror
suspects at the beginning of the year has returned the
issue of separatism in the south to the front pages
placing doubt over the stability of the country and the
leadership of President Aquino.
• The resultant political crisis has removed any remaining
political capital held by the President limiting his
capacity to push through economic reforms. The
President will also have little ability to impact the
outcome of the presidential election in 2016 in which he
will not be a candidate.
• Hopes of a peaceful resolution to the 40 year separatist
campaign have now faded with attitudes in the north of
country hardening against a peace deal.
• High levels of youth unemployment and poverty are
adding to the social and political tensions.
Political risk outlook 13
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Political risk spread - Philippines
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USD : PHP
COUNTRY IN FOCUS: VIET NAM – ECONOMY REMAINS FOCUS AS POLITICAL TRANSITION BEGINS
• Viet Nam’s political risk spread has narrowed as
economic reform remains the top priority for the
country’s leadership. However, key political and
strategic challenges lie ahead.
• Viet Nam is entering a period of political transition
as it begins the process of selecting a new
leadership. This byzantine process will consume the
political elite throughout 2015 as reformist and
conservative forces wage battle for key leadership
positions to be announced in 2016.
• At the same time Viet Nam is straddling Asia’s
strategic divide as it seeks to maintain healthy
relations with the region’s two dominant powers –
China and the United States.
• However, its disputes with China over access to key
sea lanes and its interest in joining the US led Trans-
Pacific Partnership, which excludes China, will add
to tensions in the region and be a key focus of
leadership deliberations throughout 2015.
Political risk outlook 14
110
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Political risk spread - Viet Nam
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US imports / exports - Viet Nam
Exports
Imports
GLOBAL ISSUES
CRISIS IN EUROPE – Greek elections remind markets that the
Euro-crisis is yet to be resolved
Political risk outlook 16
• The election of the left-wing Syriza party in Greece and ascension of Alex Tsipras to the Prime Ministership, supported by a collection of far left and right parties, is a reminder of both the discontent still prevalent across the European electorate and that the Euro-crisis has been postponed, not resolved.
• While all parties claim to want a negotiated outcome there are growing tensions within the EU political elite with some seeking an accommodation of Greece to avoid a Grexit while others recognise that allowing Greece to escape its bailout conditions will strength the hand of similar movements across Europe. The governments of Spain, Portugal and Italy are likely to come under particular pressure if they have proved unable to negotiate an outcome for their countries similar to that of Greece.
• The current situation is a reminder that Europe can not kick its problems down the road indefinitely and that it is rapidly approaching the point at which the continent’s leaders must find an enduring political solution to what has been a political problem over a decade in the making.
• The political weakness at the heart of Europe is also evident in its continued inability to craft a decisive response to Vladimir Putin’s posturing in the east. Europe is split between those attracted to Putin’s anti-West rhetoric, those who simply don’t wish to upset a major energy supplier and those pushing for a more robust response. The resultant lackluster response from Europe lays bare the political crisis at the heart of the European project.
THE FUTURE OF THE EU – ELEVATED LEVELS OF YOUTH UNEMPLOYMENT UNDERPIN SOCIAL TENSIONS AND SUPPORT FOR ANTI-EU PARTIES
Political risk outlook 17
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EU unemployment - total pop. versus youth
Unemployment - total population (5) Unemployment - youth (%)
THE WEST DOESN’T UNDERSTAND PUTIN – markets must
recognise that volatility will remain until a political solution is
found
Political risk outlook 18
• The West continues to respond to Russia’s increasing aggression with economic measures in the belief that this will give President Vladimir Putin and his network pause for thought. But this is a fundamental misreading of events in which an economic solution is being sought to a political crisis.
• To understand Putin’s behaviour take a look at a map. To the north is the Artic, which is rich in resources but provides little access for the Russian navy to the sea-lanes of the world. This makes warm water ports of vital strategic importance.
• To the south is China and Kazakhstan with the resource rich ‘Stans beyond. They were once an important buffer for the motherland but are now the subject of a global battle for influence and resources.
• To the south-west is the Black Sea and the warm water port of Sevastopol in Crimea, providing critical access to the Mediterranean and beyond. This waterway is of paramount importance for Russia as is controlling land based access routes. No amount of economic sanctions will change this reality or dissuade Putin from his pursuit of security. Such a search for security has pre-occupied Russia’s rulers since before Peter the Great.
• Investors anticipating an easing of tensions as sanctions begin to bite must understand that Putin views the world through a political prism, not an economic one. Sanctions are likely to remain and Russia’s economy likely to deteriorate for some time yet. Resolution will come from either the collapse of Putin’s regime, an easing of Western sanctions or a recognition that they have failed as Russia continues to do business with China and a host of smaller countries that continue to drift from the West’s orbit. None of these will happen quickly.
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. [email protected],au e. [email protected]
About Political Monitor
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insight into the implications of political risk for commercial valuations, asset selection,
investment decisions, strategic planning and operational decisions.
Political risk outlook 19
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APPENDIX 1 - AUSTRALIAN POLITICAL RISK INDEX METHODOLOGY
The Political Monitor Australian Political Risk Index is a dynamic index that tracks the
level of policy uncertainty in Australia relying on a number of variables including
market volatility and the dispersion of private sector economic forecasts. The index is
refreshed daily providing an up to date gauge of political and policy uncertainty.
Political risk outlook 21
APPENDIX 2 – POLITICAL RISK SPREADS• The Political Monitor political risk spread is a proprietary score that quantifies the component of a
country’s sovereign risk spread (the difference between yields on 10 year US Treasuries and
comparable debt in respective countries) attributable to political factors such as stability of
government, judicial independence, corruption, poverty levels, food security and a range of
demographic factors such as the size of the population under the age of 30.
• The political risk spread allows investors to make a clearer distinction between the different types of
risk that influence sovereign yields. This approach means investors can distinguish between political
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 mitigate political risk in each market.
• Political Monitor provides political risk spreads for 15 nations across Asia and 7 in which Australia’s
major mining companies have operations.
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APPENDIX 3 - ECONOMIC & INVESTMENT IMPACT OF POLITICAL & SOCIAL INSTABILITY – DOES IT MATTER?• Political risk is the second ranked concern for publicly traded companies … "Looking ahead, investors
continue to be wary about the effects of systemic risk, politics and regulation on the world's markets and
how they'll perform.” (BNY Mellon, Global Trends in Investor Relations, 2014).
• In general political instability results in:
• (a) lower economic growth (Aisen & Veiga, 2013)
• (b) reduced private sector investment (Alesina & Perotti)
• (c) increased inflation levels & volatility (Aisen & Veiga, 2008).
• The economic effects of political & 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 International Monetary Fund (IMF) estimates the economic loss to Libya, Egypt, Tunisia, Syria, Yemen,
and Bahrain in 2011 at USD$20.56 billion as a result of political and social conflict.
Political risk outlook 23