Aon: Economic Crisis Heightens Political Risk

January 28, 2009

2009 will see the political consequences of the global credit crunch start to have an impact, according to the 16th annual Political Risk Map, launched today by Aon Risk Services, a division of Aon Corporation.

In a global webcast, Aon’s political risk and trade credit experts discussed how the economic instability caused by the credit crunch has also taken its toll on political stability.

Miles Johnstone, director of Aon’s Political Risk team, explained: “This year’s map reflects how the impact of the credit crunch is shifting from being an economic problem to a political problem. When an economy is in downturn, the government has less resource available to deal with issues when they arise, potentially leading to political instability.”

Johnstone noted that several Eastern European countries are already seeing political unrest, as well as Iceland and Greece, where there is a rise in exchange transfer and sovereign non-payment risk as well as an increase in widespread protests and street disturbances.

Emergence of Very High Risk Nations
The past year has seen a number of High Risk countries continue to deteriorate to the point where Aon believes the gap between seven countries — Afghanistan, Congo DRC, Iran, Iraq, North Korea, Somalia and Zimbabwe — and other High Risk countries warranted the creation of a Very High Risk category.

Miles commented: “The level of risk in these countries just continued to get worse. It has reached the point where although we have been able to secure insurance cover for some clients in some of these territories, it is not always available.”

The Commodity Crunch
This year’s map includes a Commodity Crunch Exposure Matrix, which identifies the countries most vulnerable to political instability in 2009 if commodity prices continue to fall, as has been suggested by some forecasters.

“Volatility in global commodity prices in the 1970s and early 1980s contributed to political and economic instability in a number of countries,” according to Roger Schwartz, senior vice president of Aon Trade Credit. “Countries that recently benefited from very high commodity prices may suffer as they fall.”

Such commodities include oils, metals and minerals, Schwartz said.

“Interestingly, the resource nationalism prevalent last year when commodity prices were rising continues, despite the fact prices are now firmly on a downward trend,” he added.

A Move to the Middle
A reflection of the general rise in the risk level globally, the past year has been notable for a significant shift from the Low Risk category to the Medium-Low category. Six Eastern European countries, Estonia, Hungary, Latvia, Lithuania, Slovakia and Slovenia, as well as Greece and Iceland, received a downgrade.

On the other hand, four High Risk countries, Malawi, Moldova, Syria and Turkmenistan, saw an improvement in their status to Medium-High Risk.

Other movements on the 2009 map include 13 countries that were upgraded to a lower risk level: Algeria, Benin, Cameroon, Colombia, Kuwait, Lesotho, Libya, Malawi, Moldova, Morocco, Syria, Tunisia and Turkmenistan.

Eighteen countries have been downgraded to a higher risk level: Afghanistan, Congo DRC, Estonia, Greece, Hungary, Iceland, Iran, Iraq, Latvia, Lithuania, Malaysia, Mauritania, North Korea, Slovakia, Slovenia, Somalia, Thailand and Zimbabwe.

Miles concluded: “It is an uncertain future for many companies and many sectors. Just how some of these issues, such as the commodity crunch, will play out is unclear. We have seen a significant increase in enquiries over the past year from companies seeking political risk cover. It remains to be seen how and to what extent demand for cover is affected by the ongoing impact of the credit crunch on global trade and investment.”

Aon ranked the political risk of 209 countries and territories, measuring risk of currency inconvertibility and transfer; strikes, riots and civil commotion; war; terrorism; sovereign non-payment; political interference; supply chain interruption; legal and regulatory risk. The risk in each country was ranked as Low, Medium-Low, Medium, Medium-High, High or Very High. A country with an “elevated” risk is defined as any country with a risk ranked at Medium-Low, Medium, Medium-High, High or Very High.

The results of the analysis are detailed on the 2009 Political Risk Map, produced by Aon Risk Services in partnership with Oxford Analytica, an international consulting firm. Oxford Analytica draws its analysis from a global network of more than 1,000 experts — including senior faculty members at Oxford University and at major research institutions worldwide — to make independent judgments about geopolitical risk.

Source: Aon

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