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Aon Study Finds Elevated Risk in Some of the World’s Largest Economies

05 February 2008 Aon Corporation

Aon, a leading global insurer, has released its annual Political and Economic Risk map indicating that 25 of the 50 largest global economies and multinational organisations face elevated political and economic risks – including risks of business interruption caused by war, terror attacks and political interference.

South Africa is currently rated medium risk on the Political Risk Map and the rating has been stable for a number of years according to the analysis released by Aon Trade Credit Global, a unit of Aon Corporation (NYSE: AOC).

“South Africa generates approximately 40% of African GDP and one can’t overlook its political and economic influence on the continent,” says Hennie Bothma (pictured right), Aon South Africa’s Business Unit Head: Trade Credit and Political Risks. “We can lay claim to extensive mineral resources, quality infrastructure and diversified industry. South Africa also boasts a highly developed services sector (banking, telecommunications and transport).”

Further positive factors that influence the rating of the country include political stability, good economic management and the quality of the business environment. The country also enjoys good ratings in terms of credit worthiness and can subsequently procure substantial capacity to contract new loans.

“Weaknesses include the need for higher growth rates to combat unemployment, poverty and the growing AIDS pandemic, a growing current account deficit and leadership issues within the ANC. Shortage of resources and skilled labour is also limiting growth potential,” says Bothma. “The country is dependent on foreign capital inflows to cover growing external financial needs and is therefore vulnerable to changing conditions in the international economic environment. The country’s social and economic dualism has resulted in a wage gap constituting a source of social and political tensions – and this remains the most significant political risk factor.”

Bothma cautions that the current risk status is however based on research conducted six months ago and it does not take into account the full impact of the rolling blackouts which will only probably be felt in a couple of months and this could have serious implications for South Africa.

A global view

Among the top 50 economies, the analysis found political and economic risk is at its highest in the oil-rich nations of Iran, Nigeria and Venezuela, where businesses face civil unrest, war, terrorism and nonpayment by governments for services rendered.

While the likelihood of terror attacks, crippling regulatory changes or strikes and civil unrest is relatively low in most of the world’s wealthiest nations, such risks are very real in the nations whose economies are among the fastest growing. For example, companies doing business in Russia face an increased degree of state control in the natural resources sector. Additionally, the global risk management community is increasingly concerned about supply chain risks in Asia.

“I have noted a significant increase in the number of CEOs, CFOs and chief risk officers who are seeking a greater understanding of how their businesses are at risk in an increasingly complex global environment versus their primary risk concerns ten years ago,” said Bryan Squibb, managing director of Aon Trade Credit Global. "Risk is one of the fundamental drivers of the global economy, and misunderstanding it can be fatal to a business. As the global business landscape is constantly changing, the Political and Economic Risk Map provides our clients with the proper analytical tools to assess political and economic risk and how it will impact their sustainable growth, continuity and profitability."

The Global Credit Crunch

Slowed global economic growth – particularly in the United States, where falling home values and rising unemployment are contributing to fears the world’s largest economy will sink into recession this year – will directly impact companies’ credit quality, increasing the risk of nonpayment of receivables.

Some countries, particularly the newer entrants to the global economy, are more likely to be impacted by a global credit crunch. Some examples are Turkey, Hungary and Romania.

Aon’s Global Credit Crunch Index, a new feature in the analysis of measuring emerging markets’ exposure to international financial turmoil, lists 25 nations for which exposure to the global credit crunch is other than Low, i.e. Medium-Low, Medium, Medium-High or High.

The Largest and Fastest Growing Economies

While political and economic risks to companies doing business in the United States, Germany and the United Kingdom – the world’s largest, third largest and fifth largest economies, respectively – are comparatively low, companies doing business in those countries are potentially more vulnerable to business interruption due to terror attacks than those doing business in Japan, the world’s second largest economy.

Risk in Brazil, Russia, India, China, South Korea and Mexico is characterised as Medium-Low or Medium. They are the only nations in the top 15 for which risk is not characterised as Low.

  • Drilling in an oil field off of Brazil’s southeast coast could lead to greater economic growth in the next five years and position the nation as one of the leading oil exporters in South America.
  • In Russia, the economic and political situation is forecast to remain steady through the presidential elections in March 2008 and beyond.
  • Discussion of the nationalisation of certain industries in regions of India should not contribute to a widening of political and economic risk in 2008.
  • In China, continued economic growth could lead to a widening of the economic disparity between rich and poor, which in turn to could lead to a slight rise in political unrest in 2008.
  • An improvement in the political climate between the United States, Japan, South Korea and North Korea is expected as new South Korean President Lee Myung Bak takes office in February. Improved relations between Seoul, Tokyo and Washington are to be expected.
  • Despite record revenues of US$100 billion in 2007, Mexico’s state-owned oil company recently reported a decline in output, exports and proven reserves.

Oil  

Most of the world’s oil reserves are held by government-controlled oil companies. As the global demand for oil continues to grow in 2008, most of the demand will continue to be met by state-owned companies in nations with elevated levels of political and economic risk.

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