Emerging economies likely to experience difficult stress test in year ahead, conditions to drive political risks: Willis

Emerging economies – with Syria, Venezuela and Zimbabwe topping the risk list – are expected to experience a difficult stress test in the year ahead, although a repeat of the emerging markets crises of the late-1990s is unlikely, notes a new risk index issued Tuesday by Willis Group Holdings.

The difficult stress test is very likely “as Chinese demand slows, commodity prices remain weak, and borrowing costs rise,” notes the latest Willis Political Risk Index, produced exclusively for Willis clients three times a year in partnership with Oxford Analytica.

“This stress test will likely see a sharp escalation of economically driven political risks, such as exchange transfer and sovereign default risks. In some countries, these economic stresses could be reflected in threats to political stability as well,” notes a statement from Willis, a global risk advisory, re/insurance broking and human capital and benefits firm.

“At this point, most analysts consider a repeat of the emerging markets crises of the late-1990s to be unlikely,” says Oxford Analytica chairman Graham Hutchings, noting that emerging economies now maintain far higher foreign exchange reserves and exchange rates tend to be more flexible.

Hutchings explains it is important to remember that stresses – commodity prices, China’s growth and interest rate hikes – will not emerge at the same time. “That said, the next year offers the potential for serious economic stress. And, as has recently been the case in Brazil, economic difficulties can quickly lead to escalating political challenges,” he cautions.

Syria, Venezuela and Zimbabwe top a list of 40 politically risky territories and destinations for foreign investment, notes the index, which has been produced three times a year every year since 2006.

In the grip of a bloody civil war since 2011, Syria is ranked in the highest risk band (extreme) for four out of the five perils recorded in the index, including political violence, terrorism, exchange transfer and sovereign default. [click image below to enlarge]

In addition, Zimbabwe and Venezuela – both territories that are beset by long-running economic problems – are ranked very high or extreme for the risk of expropriation and sovereign default, Willis reports.

“In recent months the beneficial conditions that have driven emerging market growth for the past decade are threatening to reverse,” notes the index. Overall, 19 countries have a rising risk temperature, 10 countries have a risk temperature that is falling and 11 were unchanged.

“Over recent months, we have been monitoring the rising levels of political risks, particularly in emerging market economies,” says Paul Davidson, CEO of Willis’s political and trade credit risk practice. The company’s political risk model – VAPOR, Value at Political Risk – seeks to provide clients with “the ability to assess their global portfolio risk and compare the financial impact of political risk exposures, in real dollar-value terms between countries,” Davidson adds.