www.politicalmonitor.com.au
Political risk outlook – investment pack
March 2015
OUTLINE
This presentation provides a summary of Political Monitor’s monthly Political risk outlook
– investment pack. It i...
CONTENTS
• Australian Political Risk Outlook …………………………………………………………… p. 5
• State in focus: Queensland …………………………………………………...
AUSTRALIAN POLITICAL RISK OUTLOOK
AUSTRALIAN POLITICAL RISK INDEX – domestic & global
events pushed the index to its second highest level in 10 months
Polit...
AUSTRALIAN POLITICAL RISK INDEX – domestic & global
events pushed the index to its second highest level in 10 months
Polit...
STATE IN FOCUS: QUEENSLAND – A NEW
GOVERNMENT HIGHLIGHTS POLITICAL VOLATILITY
SWEEPING THE NATION
• Queensland has entered...
STATE IN FOCUS: QUEENSLAND – A NEW
GOVERNMENT HIGHLIGHTS POLITICAL VOLATILITY
SWEEPING THE NATION
• Queensland’s Budget ri...
ASIA POLITICAL RISK OUTLOOK
ASIA POLITICAL RISK OUTLOOK – rising food prices are
fueling tensions across the region
Political risk outlook 10
• Despit...
ASIA POLITICAL RISK OUTLOOK – rising food prices are
fueling tensions across the region
Political risk outlook 11
• Volati...
COUNTRY IN FOCUS: INDONESIA – ECONOMIC GAINS
BALANCE AGAINST POLITICAL CHALLENGES
• Markets are impressed with President J...
COUNTRY IN FOCUS: PHILIPPINES – OUTLOOK
WEAKENS AS SOCIAL COHESION FRAYS
• The Philippines political risk spread has widen...
COUNTRY IN FOCUS: VIET NAM – ECONOMY REMAINS
FOCUS AS POLITICAL TRANSITION BEGINS
• Viet Nam’s political risk spread has n...
GLOBAL ISSUES
CRISIS IN EUROPE – Greek elections remind markets that the
Euro-crisis is yet to be resolved
Political risk outlook 16
• T...
THE FUTURE OF THE EU – ELEVATED LEVELS OF YOUTH
UNEMPLOYMENT UNDERPIN SOCIAL TENSIONS AND
SUPPORT FOR ANTI-EU PARTIES
Poli...
THE WEST DOESN’T UNDERSTAND PUTIN – markets must
recognise that volatility will remain until a political solution is
found...
Detailed analysis on these and other political risks confronting investors can be found at
www.politicalmonitor.com.au
To ...
DISCLAIMER & COPYRIGHT
Disclaimer
Information in this document is subject to change without notice and does not represent ...
APPENDIX 1 - AUSTRALIAN POLITICAL RISK INDEX
METHODOLOGY
The Political Monitor Australian Political Risk Index is a dynami...
APPENDIX 2 – POLITICAL RISK SPREADS
• The Political Monitor political risk spread is a proprietary score that quantifies t...
APPENDIX 3 - ECONOMIC & INVESTMENT IMPACT OF
POLITICAL & SOCIAL INSTABILITY – DOES IT MATTER?
• Political risk is the seco...
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Political risk outlook investment pack - March 2015

A leadership crisis in Australia, rising food prices across Asia and Russia’s search for security are all shaping markets. The Political Monitor Political Risk Outlook Investment Pack examines these issues and more, including: Australian Political Risk Index - examines how recent political events have unnerved investors - State in focus: a change of government in the resource rich state of Queensland - The impact of rising food prices in Asia - Countries in focus: Indonesia, Philippines and Viet Nam - Global outlook - how events in the EU and Russia are shaping markets.
Published on: Mar 4, 2016
Published in: Economy & Finance      
Source: www.slideshare.net


Transcripts - Political risk outlook investment pack - March 2015

  • 1. www.politicalmonitor.com.au Political risk outlook – investment pack March 2015
  • 2. OUTLINE This presentation provides a summary of Political Monitor’s monthly Political risk outlook – investment pack. It includes Political Monitor’s proprietary risk scores and indices and domestic, regional and global analysis of the commercial implications of political trends and events. To find out more about subscribing to the full monthly pack please contact: Damian Karmelich Steve Cusworth Partner – Sydney Partner - Melbourne p. 0407 772 548 p. 0417 178 697 e. karmelichd@politicalmonitor.com.au e. cusworths@politicalmonitor.com.au
  • 3. CONTENTS • Australian Political Risk Outlook …………………………………………………………… p. 5 • State in focus: Queensland ……………………………………………………… p. 7 • Asia Political Risk Outlook ………………………………………………………………….. p. 9 • Country in focus: Indonesia …..……….…… ……..……....… ……...….……... p. 12 • Country in focus: Philippines ……………………………….…………………… p. 13 • Country in focus: Viet Nam …………….…… ……..….………..… …………... p. 14 • Global issues ………………………………..………………………….….……………..….. p. 15 • Appendix 1 – Australian Political Risk Index methodology…….……………...……..….. p. 21 • Appendix 2 – Political risk spread methodology ……………………………………..…… p. 22 • Appendix 2 - Economic & investment impact of political and social instability ……..… p. 23 Political risk outlook 3
  • 4. AUSTRALIAN POLITICAL RISK OUTLOOK
  • 5. AUSTRALIAN POLITICAL RISK INDEX – domestic & global events pushed the index to its second highest level in 10 months Political risk outlook 5 0 2 4 6 8 10 12 14 16 18 PoliticalUncertaintyScore Australian Political Risk Index Source: Political Monitor
  • 6. AUSTRALIAN POLITICAL RISK INDEX – domestic & global events pushed the index to its second highest level in 10 months Political risk outlook 6 • The political crisis surrounding Prime Minister Tony Abbott’s leadership has brought government business to a standstill and pushed the Australian Political Risk Index to a 10 month high. • However, long before the prospect of a leadership challenge emerged the index was experiencing high levels of volatility as the Government’s failure to pass key legislation weighed on markets. In particular, ongoing controversy about renewable energy targets, higher education reforms and budget measures all added to concerns about Australia’s policy outlook. • A change of government in Queensland – Australia’s third largest state – has also added to uncertainty as business tries to come to terms with the implications of Labor’s win. In addition to policy changes, the failure of the Conservative Government to remain in power despite a landslide victory just four years ago adds to the level of political uncertainty across Australia as the electorate proves to be increasingly volatile. Meanwhile, an election in Australia’s largest state of New South Wales (NSW) is due at the end of March. • Global events are also having an influence on the index as an anti-austerity party comes to power in Greece refocusing investors attention on the challenges confronting the European Union (EU). Meanwhile, Russia continues to cast a shadow over markets as it shows no signs of easing its intrusion into the politics of its neighbours leaving the West with little choice but to consider additional economic sanctions against the Putin regime.
  • 7. STATE IN FOCUS: QUEENSLAND – A NEW GOVERNMENT HIGHLIGHTS POLITICAL VOLATILITY SWEEPING THE NATION • Queensland has entered a period of heightened risk as markets grapple with the policy and budgetary implications of Labor’s return to power. • Minority government, a relatively untested leader and budget strains all suggest an extended period of uncertainty for Queensland businesses. • Furthermore, the Labor caucus will have to deal with the return of a number of former Ministers swept out of office in the 2011 Newman landslide who are likely to demand senior roles in the new government, each with strong policy preferences and some with leadership aspirations. This will create tensions for the new government. Political risk outlook 7 0 20 40 60 80 100 120 140 Total Risk Score Budget Risk Policy Risk Stability Risk Reputational Risk State Political Risk Index - February 2015 NSW Vic Qld WA SA Tas
  • 8. STATE IN FOCUS: QUEENSLAND – A NEW GOVERNMENT HIGHLIGHTS POLITICAL VOLATILITY SWEEPING THE NATION • Queensland’s Budget risk remains elevated with strained finances and a new government opposed to raising much needed cash through asset sales. This leaves the budget in a precarious position with little room to invest in much needed infrastructure. • Stability risk is very high with the new government failing to command a majority in the parliament and a crop of inexperienced MPs taking senior leadership positions. Furthermore, the return of a number of MPs who were Ministers in the former Bligh Government is likely to create leadership tensions. • Reputational risk is very high with the only daily newspaper having campaigned heavily against the new government and polls showing Labor having only a small margin for error before public dissatisfaction sets in. • As the new government beds down its operations and direction, it can be expected that a number of indicators will come down from their very high/extreme levels in the near future, however the range of challenges facing the new government will result in an elevated risk profile for some time ahead. Political risk outlook 8
  • 9. ASIA POLITICAL RISK OUTLOOK
  • 10. ASIA POLITICAL RISK OUTLOOK – rising food prices are fueling tensions across the region Political risk outlook 10 • Despite recent monthly declines in its food price index the United Nations Food and Agriculture Organization has recorded a sustained rise in food prices over the last 15 years. • The rising price of food has been accompanied by growing inequality across the region, which have been a source of tension within many countries. • Emerging markets generally suffer more from rising food prices as a larger proportion of household budgets are committed to foodstuffs. • Rising food prices were a critical factor in the Arab spring uprisings, which brought thousands of residents to the streets angry at the failure of largely corrupt governments to respond quickly to the stress many households were feeling. 50.0 100.0 150.0 200.0 250.0 300.0 1990199219941996199820002002200420062008201020122014 Annual Food Price Indices UN Food & Agricultural Organisation Food Price Index Meat Price Index Dairy Price Index Cereals Price Index Oils Price Index
  • 11. ASIA POLITICAL RISK OUTLOOK – rising food prices are fueling tensions across the region Political risk outlook 11 • Volatility adds to concerns as household budgets become more difficult to manage, particularly for low income earners. • In a number of countries – including India and Indonesia – food and fuel subsidies are being removed as part of broader efforts to reduce pressure on government budgets and tackle corruption. • While over the long term these reforms are likely to benefit the economy and allow government to better target support programs to low income households there is considerable community disquiet about the removal of subsidies threatening the electoral prospects of a number of governments. • However, these tensions may ease if the recent decline in commodity prices continue. 0.0 5.0 10.0 15.0 20.0 25.0 30.0 35.0 40.0 45.0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Domestic food price volatility index (Food & Agriculture Organisation, United Nations) Eastern Asia Southern Asia South-Eastern Asia
  • 12. COUNTRY IN FOCUS: INDONESIA – ECONOMIC GAINS BALANCE AGAINST POLITICAL CHALLENGES • Markets are impressed with President Joko Widodo’s willingness to push ahead with key reforms such as winding back fuel subsidies and tackling corruption. These have been major factors in the narrowing of Indonesia’s political risk spread. However, a number of significant political challenges remain. • Widodo’s lack of a parliamentary majority remains a major obstacle to his reform agenda. His parliamentary weakness makes him more dependent upon old-guard elements of his own party for whom combatting corruption is not a priority and economic reform takes a back seat to electoral populism. • The battle between the reform minded Widodo and old-guard Indonesian politicians will define his presidency throughout 2015 as both voters and markets seek to determine whether the President can turn his best intent into concrete political outcomes. Political risk outlook 12 145 155 165 175 185 195 Indonesia political risk spread 11400 11600 11800 12000 12200 12400 12600 12800 13000 USD : IDR
  • 13. COUNTRY IN FOCUS: PHILIPPINES – OUTLOOK WEAKENS AS SOCIAL COHESION FRAYS • The Philippines political risk spread has widened to its highest level in 12 months as social and political instability in the south continues to be a source of national tension and President Aquino faces calls for him to resign. • A failed attempt by police forces to capture two terror suspects at the beginning of the year has returned the issue of separatism in the south to the front pages placing doubt over the stability of the country and the leadership of President Aquino. • The resultant political crisis has removed any remaining political capital held by the President limiting his capacity to push through economic reforms. The President will also have little ability to impact the outcome of the presidential election in 2016 in which he will not be a candidate. • Hopes of a peaceful resolution to the 40 year separatist campaign have now faded with attitudes in the north of country hardening against a peace deal. • High levels of youth unemployment and poverty are adding to the social and political tensions. Political risk outlook 13 35 40 45 50 55 60 65 Political risk spread - Philippines 42.5 43 43.5 44 44.5 45 45.5 USD : PHP
  • 14. COUNTRY IN FOCUS: VIET NAM – ECONOMY REMAINS FOCUS AS POLITICAL TRANSITION BEGINS • Viet Nam’s political risk spread has narrowed as economic reform remains the top priority for the country’s leadership. However, key political and strategic challenges lie ahead. • Viet Nam is entering a period of political transition as it begins the process of selecting a new leadership. This byzantine process will consume the political elite throughout 2015 as reformist and conservative forces wage battle for key leadership positions to be announced in 2016. • At the same time Viet Nam is straddling Asia’s strategic divide as it seeks to maintain healthy relations with the region’s two dominant powers – China and the United States. • However, its disputes with China over access to key sea lanes and its interest in joining the US led Trans- Pacific Partnership, which excludes China, will add to tensions in the region and be a key focus of leadership deliberations throughout 2015. Political risk outlook 14 110 130 150 170 190 210 Political risk spread - Viet Nam 0 500 1000 1500 2000 2500 3000 3500 2005-01-01 2005-11-01 2006-09-01 2007-07-01 2008-05-01 2009-03-01 2010-01-01 2010-11-01 2011-09-01 2012-07-01 2013-05-01 2014-03-01 US imports / exports - Viet Nam Exports Imports
  • 15. GLOBAL ISSUES
  • 16. CRISIS IN EUROPE – Greek elections remind markets that the Euro-crisis is yet to be resolved Political risk outlook 16 • The election of the left-wing Syriza party in Greece and ascension of Alex Tsipras to the Prime Ministership, supported by a collection of far left and right parties, is a reminder of both the discontent still prevalent across the European electorate and that the Euro-crisis has been postponed, not resolved. • While all parties claim to want a negotiated outcome there are growing tensions within the EU political elite with some seeking an accommodation of Greece to avoid a Grexit while others recognise that allowing Greece to escape its bailout conditions will strength the hand of similar movements across Europe. The governments of Spain, Portugal and Italy are likely to come under particular pressure if they have proved unable to negotiate an outcome for their countries similar to that of Greece. • The current situation is a reminder that Europe can not kick its problems down the road indefinitely and that it is rapidly approaching the point at which the continent’s leaders must find an enduring political solution to what has been a political problem over a decade in the making. • The political weakness at the heart of Europe is also evident in its continued inability to craft a decisive response to Vladimir Putin’s posturing in the east. Europe is split between those attracted to Putin’s anti- West rhetoric, those who simply don’t wish to upset a major energy supplier and those pushing for a more robust response. The resultant lackluster response from Europe lays bare the political crisis at the heart of the European project.
  • 17. THE FUTURE OF THE EU – ELEVATED LEVELS OF YOUTH UNEMPLOYMENT UNDERPIN SOCIAL TENSIONS AND SUPPORT FOR ANTI-EU PARTIES Political risk outlook 17 0 5 10 15 20 25 Dec-13 Sep-14 Oct-14 Nov-14 Dec-14 EU unemployment - total pop. versus youth Unemployment - total population (5) Unemployment - youth (%)
  • 18. THE WEST DOESN’T UNDERSTAND PUTIN – markets must recognise that volatility will remain until a political solution is found Political risk outlook 18 • The West continues to respond to Russia’s increasing aggression with economic measures in the belief that this will give President Vladimir Putin and his network pause for thought. But this is a fundamental misreading of events in which an economic solution is being sought to a political crisis. • To understand Putin’s behaviour take a look at a map. To the north is the Artic, which is rich in resources but provides little access for the Russian navy to the sea-lanes of the world. This makes warm water ports of vital strategic importance. • To the south is China and Kazakhstan with the resource rich ‘Stans beyond. They were once an important buffer for the motherland but are now the subject of a global battle for influence and resources. • To the south-west is the Black Sea and the warm water port of Sevastopol in Crimea, providing critical access to the Mediterranean and beyond. This waterway is of paramount importance for Russia as is controlling land based access routes. No amount of economic sanctions will change this reality or dissuade Putin from his pursuit of security. Such a search for security has pre-occupied Russia’s rulers since before Peter the Great. • Investors anticipating an easing of tensions as sanctions begin to bite must understand that Putin views the world through a political prism, not an economic one. Sanctions are likely to remain and Russia’s economy likely to deteriorate for some time yet. Resolution will come from either the collapse of Putin’s regime, an easing of Western sanctions or a recognition that they have failed as Russia continues to do business with China and a host of smaller countries that continue to drift from the West’s orbit. None of these will happen quickly.
  • 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 Steve Cusworth Partner - Sydney Partner - Melbourne p. 0407 772 548 p. 0417 178 697 e. karmelichd@politicalmonitor.com,au e. cusworths@politicalmonitor.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. 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 2015. 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 2015. All Rights Reserved . ACN 166 162 572. Political risk outlook 20
  • 21. APPENDIX 1 - AUSTRALIAN POLITICAL RISK INDEX METHODOLOGY The Political Monitor Australian Political Risk Index is a dynamic index that tracks the level of policy uncertainty in Australia relying on a number of variables including market volatility and the dispersion of private sector economic forecasts. The index is refreshed daily providing an up to date gauge of political and policy uncertainty. Political risk outlook 21
  • 22. APPENDIX 2 – POLITICAL RISK SPREADS • The Political Monitor political risk spread is a proprietary score that quantifies the component of a country’s sovereign risk spread (the difference between yields on 10 year US Treasuries and comparable debt in respective countries) attributable to political factors such as stability of government, judicial independence, corruption, poverty levels, food security and a range of demographic factors such as the size of the population under the age of 30. • The political risk spread allows investors to make a clearer distinction between the different types of risk that influence sovereign yields. This approach means investors can distinguish between political risks and more general economic risks when assessing country specific investments. • The scores are refreshed daily for countries where publicly available data on bond yields are available. They are general in nature and do not take into account the capacity of individual firms to manage and mitigate political risk in each market. • Political Monitor provides political risk spreads for 15 nations across Asia and 7 in which Australia’s major mining companies have operations. Political risk outlook 22
  • 23. APPENDIX 3 - ECONOMIC & INVESTMENT IMPACT OF POLITICAL & SOCIAL INSTABILITY – DOES IT MATTER? • Political risk is the second ranked concern for publicly traded companies … "Looking ahead, investors continue to be wary about the effects of systemic risk, politics and regulation on the world's markets and how they'll perform.” (BNY Mellon, Global Trends in Investor Relations, 2014). • In general political instability results in: • (a) lower economic growth (Aisen & Veiga, 2013) • (b) reduced private sector investment (Alesina & Perotti) • (c) increased inflation levels & volatility (Aisen & Veiga, 2008). • The economic effects of political & 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 International Monetary Fund (IMF) estimates the economic loss to Libya, Egypt, Tunisia, Syria, Yemen, and Bahrain in 2011 at USD$20.56 billion as a result of political and social conflict. Political risk outlook 23

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