Anti-corruption reforms and the lifting of sanctions have eased political risk in China, Aon Risk Solutions’ 2016 Political Risk Map for emerging markets has found.
However, the rebalancing and slowing of the world’s second largest economy is likely to present challenges for China’s neighbours and key trading partners, who could experience higher political and economic risks as the pace and composition of growth changes.
“By clamping down on off-balance sheet debt and implementing fiscal reforms in support of local debt restructuring, China will start delivering more efficient albeit slower growth over the next few years,” said Mr Miles Johnstone, Head of Structured Credit & Political Risk in Asia.
“Despite continuing volatility in the stock market and sharp currency adjustments, in the medium-term, China will see better growth: reduced capital waste, less white elephant infrastructure spending, less corruption and less unproductive debt. In the meantime, the slowdown in Chinese demand for commodities and other imports continues to drag down economic growth amongst China’s key trading partners including Australia and Singapore, and to a lesser extent Malaysia, Philippines and Vietnam.”
Reductions in political risk among emerging markets
This year’s map shows, for the first time in the past three years, more countries among emerging markets reflecting reductions in political risk than increases, which is an encouraging sign of the impact of political and economic reforms, said Mr Karl Hennessy, president of Aon Broking and CEO of Aon’s Global Broking Centre in London.
“Despite increases in economic risks stemming from low commodity prices, improvements in political stability have occurred. However, weakness in the global economy could yet cause significant increases in political risks within countries and spill-over effects into others states,” he said.
Still a struggle for some countries to implement reform plans
The outlook for many emerging market economies will be based on whether politicians are able to implement pledged reforms to attract more investment at a time when weaker global trade and economic growth is increasing competition for capital.
So far, many of the structural reform plans have disappointed, weakening growth and reducing resiliency to shocks. Two in the spotlight this year are India and Indonesia, which have stronger balance sheets than many peers, but which have been struggling to implement policies.
Aon’s Political Risk Map is based on analysis of 162 emerging markets (excluding EU and OECD countries) tracking 168 different recognised risk attributes.