Weak commodity prices to fuel political risk in 2016

The global turbulence of 2015 will continue in the coming year, according to the 2016 Political Risk Outlook released by Verisk Maplecroft.

The research and investing information specialist expects little respite from “the political instability, civil unrest, economic volatility, security crises and geopolitical rivalries that defined the last 12 months” in 2016.

The company highlights low commodity prices as one of the primary drivers of political risk for investors in major producing countries across Africa and Latin America, while the increasing international threat posed by the Islamic State and rising tensions between Iran and Saudi Arabia, are flagged among the foremost geopolitical risk multipliers.

Commodity downturn

The 2016 Outlook forecasts that job losses in the extractives sector of Africa’s resource-rich countries will probably provoke industrial action, while the impacts of depressed oil, gas and metals prices on domestic government spending and rising living costs across the region are likely to stoke social turmoil.

Verisk Maplecroft’s Civil Unrest Index 2016 already categorises 31 of sub-Saharan Africa’s 49 countries as falling within the ‘high’ or ‘extreme’ risk category, underscoring the threat of disruption for companies operating in these markets. In particular, Central African Republic, Sudan, Kenya, Ethiopia, DR Congo, South Africa and Nigeria are highlighted as countries to watch

The risk of civil unrest will be compounded by a strong El Niño event extending into early 2016, which may increase the cost of food staples due to lower rainfall affecting agricultural outputs. Verisk Maplecroft’s Food Security Index 2016 shows that all but five African countries are considered ‘high’ or ‘extreme’ risk.

Corruption in Latin America

The company notes that the end of the commodities boom that fuelled Latin America’s decade-long growth has laid bare the profligacy of South America’s two largest economies, Brazil and Argentina, and the largest oil producer in the region, Venezuela.

Lower commodity prices, coupled with chronic economic mismanagement, dealt heavy electoral losses to the ruling parties of Argentina and Venezuela in late 2015. The 2016 Outlook anticipates that both countries will experience a rise in political instability as they make the painful adjustments necessary to get back on a more sustainable growth track.

In Brazil, corruption and economic recession will dominate the political landscape. Although the ongoing impeachment process against President Dilma Rousseff is not expected to be successful, it will ensure protracted legislative gridlock during 2016 and prevent the passage of the reforms required to arrest the deteriorating fiscal landscape and restore investor confidence. The mass anti-government protests witnessed in 2015 are set to continue and could spike in the run up to the summer Olympic Games in Rio de Janeiro.

The region’s economic problems are compounded by social concerns over graft in 2016, increasing the risks of political and civil instability, as the newly formed lower middle class see their socioeconomic gains threatened or reversed. Verisk Maplecroft’s Corruption Risk Index 2016 identifies Argentina, Colombia, Ecuador, Peru, Venezuela and Brazil as posing a ‘high’ or ‘extreme’ risk.

Global terrorism threats rise

Verisk Maplecroft recorded an estimated 7,750 conventional terrorist acts in 2015 and does not expect the global risk from terrorism to diminish in 2016, with the Middle East and Africa on the frontline in the fight against fanatical and violent Islam.

Islamic State will remain resilient in Syria and Iraq, despite the international coalition’s efforts to defeat the group. This is partly at least due to a lack of alignment in the agendas or methods employed by key local, regional and global powers involved in Syria and Iraq.

As the international coalition doubles its efforts to eradicate Islamic State, the group is expected to add momentum to its terrorist campaign well beyond its heartland in Syria and Iraq. Armed groups which have pledged allegiance to the Islamic State in such countries as Egypt, Libya and Nigeria will figure prominently in 2016, exacerbating existent security concerns in these countries.

Last November’s terrorist attacks in Paris suggest that Western intelligence agencies will continue to struggle to manage the risk posed by returning western members of the Islamic State and lone wolf attackers at home.

Europe faces crunch year

For Europe, populist parties will seek to drum up further support amid the ongoing inward flow of migrants, predicts Verisk Maplecroft.

Public disillusionment with the European Union (EU), the uneven pace of economic growth in the eurozone in combination with concerns over record levels of migration into the European club, will sustain pressure on the political mainstream. This could make government policy and legislation less predictable and less conducive to business.

Whether the UK has a future in the EU and whether Greece can hold onto the euro will likely be determined in 2016. A negative vote in a referendum on the issue would cause months of severe uncertainty for business within the UK and mainland Europe.

Meanwhile, Greece’s future in the common currency will depend on Athens’ continued readiness to execute painful structural economic reforms and service national debt – and whether the reforms can succeed.

Saudi/Iran tussle tops geopolitical concerns

Geopolitical tensions will remain acute – or even increase – in several regions of the world in 2016. An accord between Tehran and Riyadh is seen as unlikely, instead both will intensify their struggle for influence and power in the Gulf, Levant and beyond.

Intensified conflict through proxy forces could increase the risk of disruptions to business operations and supply chains in the MENA region. The execution by the Saudi authorities of prominent Shi’ite Sheikh Nimr al-Nimr earlier this month has caused a full rupture in bilateral diplomatic ties, with Iran’s supreme leader predicting divine vengeance.

Supreme Leader Ali Khamenei may increasingly pursue a more confrontational foreign policy in a bid to appease hard-line elements in the Revolutionary Guard and clerical establishment who oppose the nuclear agreement that was signed by Iran and world powers last July. The company cites the test-firing of Iranian rockets near American warships in the Strait of Hormuz late last month as a case in point.

Russia’s president Vladimir Putin has engaged more closely with western countries in the fight against the Islamic State and has at least temporarily reduced the number of Russian resources committed to the Ukraine conflict. However, western sanctions are unlikely to be dropped in 2016 and Russia continues to be classified as ‘high risk’ in Verisk Maplecroft’s Legal and Regulatory Environment Index 2016.

The crisis between North Atlantic Treaty Organisation (NATO) member Turkey and Russia over last month’s shooting down of a Russian fighter jet, the Russian government’s continuous support for Syrian president Bashar al-Assad, and Moscow’s refusal to stop meddling in Ukraine will, to varying degrees, remain points of friction with the US and Europe.

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