Political risk outlook investment pack - March 2014 - slideshare


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The Political Monitor monthly political risk outlook pack examines key political trends and events likely to shape markets in the month ahead. It includes political risk scores, indices and analysis of the interplay between politics & markets.

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Political risk outlook investment pack - March 2014 - slideshare

  1. 1. Poli%cal  risk  outlook  –  investor  pack     March  2014   www.politicalmonitor.com.au!
  2. 2. 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. karmelichd@politicalmonitor.com,au ! ! ! ! ! ! ! ! !Steve Cusworth! !Partner - Melbourne! !p. 0417 178 697! !e. cusworths@politicalmonitor.com.au !
  3. 3. 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!
  5. 5. 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!
  6. 6. 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!
  8. 8. 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!
  9. 9. 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!
  10. 10. 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!
  11. 11. 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!
  12. 12. 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!
  13. 13. 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!
  14. 14. GLOBAL  ISSUES  
  15. 15. 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!
  16. 16. 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!
  17. 17. 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!
  18. 18. 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!
  19. 19. 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!
  20. 20. DISCLAIMER & COPYRIGHT! Disclaimer ! Information in this document is subject to change without notice and does not represent a commitment on the part of Seller.! Seller does not warrant the accuracy, completeness or timeliness of any of the data and/or programs (“Information”) available within the report. The Information is provided “as is” without warranty of any kind, express or implied, including, but not limited to, implied warranties of merchantability, fitness for a particular purpose, title or non-infringement.! In no event will Seller or its affiliates be liable to any party for any direct, indirect, special, consequential or other damages for any use of or reliance upon the Information found within the report, or on any other reference documentation, including, without limitation, lost profits, business interruption, loss of programs or other data, even if Seller is expressly advised of the possibility of such damages.! The disclaimer is in addition to the specific terms and conditions that apply to the products or services offered by Seller.! Copyright! Copyright © Political Monitor Pty Ltd 2014. This document is copyright and contains confidential information that is the property of Seller. Except for the purposes of executing or applying this report, no part of this document may be copied, stored in a retrieval system or divulged to any other party without written permission. Such rights are reserved in all media.! Intellectual property rights associated with the methodology applied in arriving at this document, including templates and models contained there in, reside with Political Monitor Pty Ltd, excepting client information it contains that is demonstrably proprietary to the client or covered by an agreement or contract defining it as such.! No part of this report may be reproduced, transmitted, stored in a retrieval system, or translated into any language in any form by any means, without the written permission of Political Monitor Pty Ltd.! ! © Political Monitor Pty Ltd 2014. All Rights Reserved . ACN 166 162 572. Political risk outlook! 20!
  21. 21. 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!
  22. 22. 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!
  23. 23. 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!