Global Political Risk Index


India's political risk outlook changed to neutral in December from positive in the preceding month on concerns that announcements on tax reforms and fiscal deficit in the national budget to be presented in February would increase volatility. The country's score remained unchanged at 63 in the Eurasia Group's latest ranking of 24 countries based on their political risk, but its position jumped to 10th from 12th in November. Although China was ranked 12th with a composite score of 62, its outlook was positive on expectation that its economy will grow at a targeted 8%. Pakistan ranked last on the list with a score of 43.

The index is a compositive measure of a country's government, society, security and economy. While the score indicates stability or instability for the month gone by, the outlook signals which way the score will move. Mint has partnered with Eurasia Group for the Global Political Risk Index and runs this every month.
DOMESTIC PRIORITIES Emerging markets nations had entered 2009 in a position of perceived weakness as the global credit crunch hobbled demand, with deteriorating government finances and rising social unrest topping the list of investor concerns.

For the most part, these fears proved unfounded. Budget deficits have been more of a concern in developed markets than in emerging markets, and there has been little social unrest.

Although many economies have emerged from recession, the effects of the global economic crisis will continue throughout 2010 with high unemployment, large government deficits and weak economies. Depending on how governments address these issues, social unrest could increase in 2010.

RATING POLITICAL STABILITY The Eurasia Group's Global Political Risk Index (GPRI) assesses political risk in 24 investable emerging markets by examining 20 indicators grouped into four categories: government, society, security and economy. All indicators are scored on a scale of zero to 100: Higher numbers indicate greater political stability, meaning a greater capacity to respond to shocks and crises. Relative political and social stability in 2009 meant that many GPRI scores showed little year-on-year change.

The current composite scores--the unweighted aggregates of the many indicators covering government, society, security and economy--for most countries in the GPRI are within two points of their end-2008 scores. However, a few countries did experience large score changes in 2009: the biggest gain in composite GPRI scores was Nigeria (+6), while Algeria (-4) and Argentina (-3) suffered the biggest declines.

The dramatic score increase for Nigeria is primarily an economic story. Nigeria was in a precarious position at the end of 2008. The price of oil, its primary export, declined precipitously in the fall of 2008, causing economic activity to drop and the government's fiscal position to deteriorate. Additionally, there was sectarian fighting in northern Nigeria during the same period. As oil prices recovered in 2009, concerns that economic turbulence would translate into political instability declined. If oil prices reverse course, however, these concerns could resurface.

Score declines in Argentina and Algeria reflect political problems. In Argentina, policymaking from President Cristina Fernandez de Kirchner's administration during the economic crisis has hurt her popularity, strengthened the Opposition and led to labour protests. In the first half of 2009, Fernandez's confrontation with farmers over proposed higher export taxes caused a significant loss of public support for the government because many Argentines sympathized with the farmers. In the June elections, Fernandez's Peronist party lost control of both the houses of congress, reducing her ability to govern and increasing the risk of policy gridlock.

Additionally, persistently high inflation worries many Argentines, and the government has been unable to control it. This is likely to continue to cause political and social unrest in 2010, especially in the context of sluggish growth.

Algeria's President Abdelaziz Bouteflika has consolidated enough political power to pursue an ideological agenda that is vigorously nationalistic and endorses an openly hostile attitude towards foreign firms that do not support Algeria's national goals. This development has worsened the investment environment and is preventing hydrocarbon production growth and economic diversification. As a consequence of these policies, there is little foreign investment outside the hydrocarbon sector and the pace of energy-related investment has slowed, keeping production flat. In addition, popular frustration with the lack of economic opportunity and development is putting real pressure on an increasingly autocratic government. In September and again in November, Algeria witnessed some of the most widespread popular riots since the civil war of the 1990s.

INTRA-YEAR SCORE CHANGES A few countries in the GPRI experienced significant changes in their scores during 2009, but ended the year in a place similar to where they started. For instance, Venezuela's government-stability score increased three points during the first four months of the year after President Hugo Chavez won a referendum to enable him to run indefinitely for re-election and consolidated revenue-generating power in the central government. Since then, Chavez's popularity has slipped. Conversely, Turkey and Hungary both saw significant decreases in their government scores during 2009, only to rebound close to their end-2008 levels. In Hungary, the ruling socialist MSZP party suffered a severe setback in the June European Parliament elections. In Turkey, the government score deteriorated in January 2009 when three retired generals were among those arrested for involvement with the nationalist Ergenekon organization, raising tension between the Justice and Development Party (AKP) government and secularists (including the military). Turkey's government stability remained low through March, as politics centered on nationwide local elections. In the end, the AKP won, albeit in a much tighter race than in previous elections, re-establishing greater predictability and contributing to higher government stability for the remainder of 2009.

OPPORTUNITY AND RISK IN 2010 The risks ahead do not lie with external factors, as was the case in 2009. Instead, domestic politics are driving how countries manage efforts to sustain economic activity and reorient their economies to a new international equilibrium--one in large part characterized by reduced consumption in wealthy economies. These policy decisions will determine the political risks associated with investing in a country. As a result, country-specific knowledge will be more important in the coming year as investors follow how particular governments manage ongoing economic problems. Countries that will continue to be risky include Argentina, Thailand and Ukraine. Further deterioration in Argentina is a real concern, especially as Fernandez begins to craft policy to help her husband's expected run for the presidency in 2011. In Thailand, political risk swirls around the ailing king. In Ukraine, political stalemate between Prime Minister Yulia Tymoshenko and President Viktor Yuschenko persists, keeping risk there high. A few countries that were considered risky in 2009 could offer upside in the coming year, such as the Philippines and Saudi Arabia. An election in the Philippines means the end of the lacklustre tenure of President Gloria Macapagal Arroyo. Both of the front-runners will avoid radical policies, recognizing the concerns of foreign investors and the business community--particularly with regard to the budget deficit.

Just as important, the winner will have the legitimacy that has evaded Arroyo for much of her presidency, providing an early window for improved political and economic governance. In Saudi Arabia, the government will face pressure from Yemeni rebels on its southern border and from domestic terrorists, but a global economic recovery and robust oil prices present the kingdom with an opportunity for a strong 2010. Riyadh will also improve its international statecraft and could be more of a force in the region. Interestingly, 2010 could be the year during which the distinction between developed and developing economies truly fades, as markets take increasing notice of the fact that some "emerging markets" are no more risky than their more developed counterparts. Brazil, Indonesia and Poland have had to manage bumps through the downturn, but relatively prudent policies have placed them in stronger positions in 2010. In these countries, volatility in economic and market performance has been subdued, even as it has increased in developed economies. Consequently, the line between emerging and developed markets will blur even further as emerging markets such as these compare more favourably with developed markets such as Greece, Spain and Ireland.

source: Live Mint