Published on March 7, 2014
Poli%cal risk outlook – investor pack March 2014 www.politicalmonitor.com.au!
OUTLINE! This presentation provides a summary of Political Monitor’s monthly Risk Outlook report. It includes Political Monitor’s proprietary risk scores and indices including the Australian Political Risk Index and the Asia Political Risk Index.! ! To ﬁnd out more about subscribing to the monthly pack please contact:! ! Damian Karmelich ! ! ! ! Partner – Sydney ! ! ! ! p. 0407 772 548 ! ! ! ! e. firstname.lastname@example.org,au ! ! ! ! ! ! ! ! !Steve Cusworth! !Partner - Melbourne! !p. 0417 178 697! !e. email@example.com !
CONTENTS! • Australian Political Risk Outlook …………………………………………………………… p. 4! • Asia Political Risk Outlook ………………………………………………………………….. p. 7! • Country in focus: Malaysia …… ………………….………..… ……...….……... p. 11! • Country in focus: Thailand ……………………..…………………..…….……… p. 12! • Country in focus: Vietnam ………………………..………………….……….….. p. 13! • Global issues ………………………………..………………………….….……………...…. p. 14! • Latest reports ……………………………………………………….……………...………… p. 18! • Appendix 1 – Australian Political Risk Index methodology…….……………...…………. p. 21! • Appendix 2 - Asia Political Risk Index methodology …………….……..…………......… p. 22! • Appendix 3 - Economic & investment impact of political and social instability …….….. p. 23! ! ! ! ! !! Political risk outlook! 3!
AUSTRALIAN POLITICAL RISK OUTLOOK
AUSTRALIAN POLITICAL RISK INDEX – political uncertainty hit a 4 week high in February with no sign of respite! • • • The Abbo7 Government’s response to the crisis at Qantas revealed a highly poli%cal Prime Minister willing to be at odds with his Treasurer if it advances his cause against the Opposi%on. This has introduced a great deal of uncertainty for policy making generally and for ﬁrms that are heavily regulated by government speciﬁcally. The announcement of a date for the Senate re-‐ run in Western Australia put the spotlight back on the Government’s challenges in the Upper House and reminded markets of the uncertainty surrounding the carbon & mining taxes and the risk of a double-‐dissolu%on elec%on. Markets are preparing for the elec%on of new governments in both South Australia & Tasmania but with li7le understanding of the priori%es and policies of either. Australian Poli7cal Risk Index 12 10 Poli%cal Uncertainty Score • 8 6 4 2 0 Global events con%nue to weigh on domes%c markets. Political risk outlook! 5!
AUSTRALIAN POLITICAL RISK INDEX & ASX200 – political & policy uncertainty continues to weight on key indices! Australian Poli7cal Risk Index vs. ASX 200 12 5500 5400 5300 8 5200 6 5100 4 ASX 200 Poli%cal Uncertainty Score 10 5000 2 4900 0 4800 PRI ASX 200 Political risk outlook! 6!
ASIA POLITICAL RISK OUTLOOK
ASIA POLITICAL RISK INDEX – rising youth unemployment is emerging as a poli%cal risk in a number of already vola%le markets • • • • • While youth unemployment in the Asia region is compara%vely lower than the rest of the world it has been rising in recent years and is forecast to con%nue doing so over coming years. Youth unemployment (%) 13.5 The rising rate of youth unemployment is becoming a signiﬁcant factor in a number of important economies including India, Indonesia and the Philippines. In Indonesia the youth unemployment rate is approaching 30% providing a fer%le hun%ng ground for religious extremists and is a key contributor to the gap between poten%al and actual GDP. In India the youth unemployment rate of 10.5% is rela%vely low but it obscures the raw number of young people unemployed, which is in the tens of millions. When combined with popula%ons with a high propor%on of people under the age of 30 the risk of social discord begins to rise pu[ng pressure on economies. 12.5 11.5 10.5 9.5 8.5 7.5 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 World East Asia South Asia Political risk outlook! 8!
ASIA POLITICAL RISK INDEX – weakened currencies have pushed up fuel prices increasing the risk of social & poli%cal discord Indonesia – the price of Brent crude has increased nearly 26% in local currency terms over the last 8 months. Rising prices was one factor in the Government’s decision to wind back fuel subsidies, which as a result have jumped 44% since the middle of 2013 causing considerable angst on the ground. India, Malaysia, Philippines & Thailand – have all experienced price rises exceeding 10% adding to poli%cal pressures in each of those countries. Australia & Japan – these developed economies have also experienced price rises exceeding 10%. In the case of Japan the jump in oil and gas prices and the resultant deteriora%on in the current account deﬁcit are large factors in Prime Minister Abe’s proposals to turn Japan’s nuclear reactors back on. Percentage increase in ICE Brent crude (local currency) 1 July 2013 -‐ 24 February 2014 30 25 20 15 10 5 0 % increase in local currency % ICE Brent Crude Increase Political risk outlook! 9!
ASIA POLITICAL RISK INDEX – meanwhile key economies are forecast to experience slower or stagnant rates of growth Indonesia GDP constant prices -‐ % change (IMF) China GDP constant prices – % change (IMF) 10 7 9 6.5 8 6 7 5.5 6 5 2011 2012 2013 2014 2015 2016 2017 2018 2011 Malaysia GDP constant price -‐ % change (IMF) 2012 2013 2014 2015 2016 2017 2018 Philippines GDP constant prices -‐ % change (IMF) 6 8 5.5 6 5 4 4.5 2 4 0 2011 2012 2013 2014 2015 2016 2017 2018 2011 Political risk outlook! 2012 2013 2014 2015 2016 2017 2018 10!
COUNTRY IN FOCUS – Malaysia: MODERATE – 29/100 • Malaysia rates as a rela%vely good risk given low levels of corrup%on, low levels of poverty and rela%vely low levels of external debt as a propor%on of GNI. • Furthermore, less than 15% of household ﬁnances are dedicated to food limi%ng the impact of any sudden vola%lity in prices. The country also rates well on food security indices. • 3.4 3.35 3.3 3.25 3.2 3.15 3.1 3.05 3 However, its weakened currency has added to the price of fuel (see slide 9). • USD : MYR The primary challenge confron%ng the country is a high level of youth unemployment at over 17%. • This is exacerbated by a large propor%on of the total popula%on being under the age of 30. At nearly 30% Malaysia has one of the highest propor%ons of young people in the region. Malaysia GDP constant price -‐ % change (IMF) 6 5.5 5 4.5 4 2011 Political risk outlook! 2012 2013 2014 2015 2016 2017 2018 11!
COUNTRY IN FOCUS – Thailand: LOW RISK– 13/100 • Thailand ranks as one of the safest countries for investors on the Asia Poli1cal Risk Index, which has surprised some analysts given recent events. • However, the country has a number of underlying strengths the ﬁrst of which is a track record of not allowing poli%cal crises to interfere with business having experienced 18 coups since becoming a cons%tu%onal monarchy in the 1930s. • USD : THB 33.5 33 32.5 32 31.5 31 30.5 30 29.5 Most importantly for the country is a very low level of youth unemployment and rela%vely low levels of poverty. The fact that such a large propor%on of the country’s youth are engaged in employment limits the risk of poli%cal discord becoming social discord. • Thailand also has rela%vely high levels of domes%c investment signaling local conﬁdence in the business outlook. • Nonetheless, recent events will act as a drag on Thailand’s economy but the longer term outlook remains robust. Thailand GDP constant prices – % change (IMF) 7.5 6.5 5.5 4.5 3.5 2.5 1.5 0.5 Political risk outlook! 2011 2012 2013 2014 2015 2016 2017 2018 12!
COUNTRY IN FOCUS – Vietnam: VERY HIGH RISK -‐ 61/100 • Vietnam is experiencing increasing levels of social discord. • While the country has rela%vely low levels of youth unemployment at under 5% it does have rela%vely high levels of poverty with more than 20% of the popula%on living below the poverty line. It has also a large propor%on of its total popula%on under the age of 30 at 25%. • USD : VND 21400 21300 21200 21100 21000 20900 20800 Vietnamese households dedicate one of the largest shares of income to food at nearly 40%, which means vola%lity in food prices has a signiﬁcant eﬀect. • Poor rankings on food security indices and an absence of opportunity for ci%zens to express grievances adds to Vietnam’s rela%vely poor ra%ng. Vietnam GDP constant prices – % change (IMF) 6.5 6 5.5 5 2011 Political risk outlook! 2012 2013 2014 2015 2016 2017 2018 13!
CRISIS IN THE UKRAINE – LOTS OF NOISE BUT LITTLE ACTION • While Europe has experienced a rela%vely mild winter and has greater stockpiles than during the Georgian crisis it nonetheless remains the case that a cold snap or extended crisis would impact Europe’s energy supply chain. 3/03/2014 1/03/2014 27/02/2014 25/02/2014 23/02/2014 21/02/2014 19/02/2014 17/02/2014 15/02/2014 13/02/2014 Europe’s response in par%cular will be largely guided by gas supply and price considera%ons rather than concerns about the Ukraine’s sovereignty. Russia has historically supplied the con%nent with 30% of its total gas requirements. 11/02/2014 • 9/02/2014 The strength of US and EU calls for Pu%n to back down are inversely related to their capacity to do anything about it. 112 110 108 106 104 102 7/02/2014 • ICE Brent crude oil futures 5/02/2014 Events in the Ukraine have illustrated the primacy of geopoli%cs as Vladimir Pu%n dismisses the economic costs of his decision to eﬀec%vely annex the Crimea in favour of ensuring control of the region and access to the Black Sea. 3/02/2014 • Natural gas futures 7 6 5 4 3 2 1 0 ! ! ! ! !! Political risk outlook! 15!
THE BATTLE FOR AFRICA – AUSTRALIAN INVESTMENT ON AN INCREASINGLY RISKY CONTINENT • Australia has considerable exposure to Africa. • In the mining sector there is around 200 Australian companies involved in over 700 projects across 37 African countries. • One in 20 Australian companies listed on the Australian Securi%es Exchange (ASX) has an investment in Africa, and Africa hosts the largest number of Australian mining projects in any region outside Australia, at around 40% of all overseas mining projects. • Furthermore, Australian FDI in Africa has grown 75 percent since 2006. • But poli%cal risks are on the rise resul%ng in increasing conﬂict across the con%nent. ! ! Political risk outlook! 16!
THE BATTLE FOR AFRICA – AUSTRALIAN INVESTMENT ON AN INCREASINGLY RISKY CONTINENT • The increase in conﬂict and the risk to investors is a consequence of four broad poli%cal trends. • Extremism – the return of extremist groups waging war and engaging in terrorism have hit at the heart of some of Africa’s most important economies including Kenya and Nigeria. • Weak borders – have facilitated the easy movement of extremist groups and weapons. The a7ack on a Kenyan shopping mall in 2013 was commi7ed by groups based in Somalia. • Inter-‐state & ethnic conﬂict – is retarding the growth of a number of economies including oil rich South Sudan. • Weak governance – allows rampant corrup%on, which adds to social discord in a region where 70% of the popula%on live on less than $2 per day. This also retards the growth of an emerging middle class. ! ! Political risk outlook! 17!
LATEST REPORTS ! ! !Australian Poli7cal Risk Index Weekly updates on our proprietary index tracking poli%cal and policy uncertainty in Australia. US set to shake up energy markets? Inﬂuential voices within America are calling for a relaxation of the ! ! ! ! ! !prohibition on crude oil exports in a move that could shake up global !energy markets.! China’s oil conundrum China’s emergence as the world’s largest oil importer makes it dependent upon the very na%on against which it is seeking to balance. ! ! !! ! ! Political risk outlook! 18!
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 Partner -‐ Sydney p. 0407 772 548 e. karmelichd@poli%calmonitor.com,au Steve Cusworth Partner -‐ Melbourne p. 0417 178 697 e. cusworths@poli%calmonitor.com.au! ! About Political Monitor! Political Monitor is a political risk research and advisory ﬁrm. Our analysis provides 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 Poli%cal Monitor Australian Poli1cal Risk Index is a dynamic index that tracks the level of policy uncertainty in Australia relying on a number of variables including market vola%lity and the dispersion of private sector economic forecasts. The index is refreshed daily providing an up to date gauge of poli%cal and policy uncertainty. ! ! ! ! ! Political risk outlook! 21!
APPENDIX 2 -‐ ASIA POLITICAL RISK INDEX METHODOLOGY The Poli%cal Monitor Asia Poli1cal Risk Index tracks nine key variables that go to the core of poli%cal risk in a country. The variables provide an indica%on of economic and social inequality, par%cularly among key demographics, and the risk of poli%cal and social turmoil. Those variables include the level of youth unemployment, corrup%on, elas%city of demand for food, the percentage of the popula%on living below the poverty line, and the propor%on of foreign debt to Gross Na%onal Income (GNI). The index provides a rela%ve score for each country. Accordingly, a low (par%cularly nega%ve) raw score signals lower rela%ve risk while a high raw score signals higher rela%ve risk. Scores have then been scaled from 0 – 100. A score of 50 signals average risk rela%ve to other countries. ! ! ! Political risk outlook! 22!
APPENDIX 3 -‐ ECONOMIC & INVESTMENT IMPACT OF POLITICAL & SOCIAL INSTABILITY – DOES IT MATTER? • Poli%cal risk is the second ranked concern for publicly traded companies … "Looking ahead, investors con%nue to be wary about the eﬀects of systemic risk, poli%cs and regula%on on the world's markets and how they'll perform.” (BNY Mellon, Global Trends in Investor Rela1ons, 2014). • In general poli%cal instability results in: • (a) lower economic growth (Aisen & Veiga, 2013) • (b) reduced private sector investment (Alesina & PeroK) • (c) increased inﬂa%on levels & vola%lity (Aisen & Veiga, 2008). • The economic eﬀects of poli%cal & 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 Interna%onal Monetary Fund (IMF) es%mates the economic loss to Libya, Egypt, Tunisia, Syria, Yemen, and Bahrain in 2011 at USD$20.56 billion as a result of poli%cal and social conﬂict. ! ! ! ! !! Political risk outlook! 23!
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