The lifting of international sanctions against Iran has eased political risk in the country, but future behaviour needs close monitoring, according to Aon Risk Solutions in its 2016 Political Risk Map for emerging markets.
The implementation of the international Joint Comprehensive Plan of Action (JCPOA), which loosened international sanctions, prompted a reduction in the country’s political risk rating in 2016 from a very high level. With uncertainty around the extent to which the country’s Revolutionary Guards and others with vested interests will play a role in the economy, the operating environment remains unclear. A stronger government position could lead to Iranian intervention elsewhere in the region and perpetuate regional political risk.
“Iran’s re-entry to global markets will increase the supply of oil, and eventually gas, as it gains access to more foreign markets including Europe,” said Ms Rachel Ziemba, Managing Director of Research at Roubini Global Economics. “Iran has a more diversified economy than many Middle Eastern and African peers and has done more to adjust to lower oil prices.”
Low oil price exacerbates existing fragility in oil dependent markets
Topping the list of political risks facing emerging market investors in 2016 is the impact of oil prices in already fragile oil-dependent countries such as Iraq, Libya, Russia and Venezuela.
The 2016 Political Risk Map indicates that countries with more resilient institutions and greater foreign currency reserves will be better positioned to minimise sovereign non-payment and exchange transfer risks, including GCC members as well as Colombia, Malaysia and Kazakhstan. Still, increased security risks in neighbouring countries such as Iraq, Algeria, Nigeria, Libya and Syria are likely to hinder improving risk outlooks for countries that might stand to benefit from cheaper oil, like Egypt, Tunisia and Morocco.
“Oil-producing nations must find substitutes for lost revenues which will put pressure on their corporate sectors at a minimum through tax regime adjustments and at the extreme through IPOs of state-owned enterprises,” said Mr Matthew Shires, Head of Political Risk for Aon Risk Solutions. “With no sign of oil prices returning to previous levels, turbulence in many oil producing states is likely to continue, and could worsen.”