A summary of the report
The WillisTowersWatson Political Risk Index contains 40 countries, and we have been monitoring many of them for more than a decade. Some are volatile, their political risk scores fluctuating between editions of the Index, while some are still relatively opaque, not yet fully integrated into the global economy. Some show risks associated with unstable governments, while others are risky because a dominant individual or clique enjoys unchallenged control of policy. And then there are some countries with scores that can remain fairly similar from one edition to the next. In recent years, Algeria has tended to be a member of the latter group. In 2013, al-Qaida-inspired militants held 800 workers hostage at the In Amenas gas plant in the south of the country close to the Libyan border, and some 40 foreign workers were killed when security forces moved in. Since then, heavy defence spending has prevented extremists from gaining a foothold in the country despite the turmoil in Libya, while a liberal use of financial reserves allowed it to weather the plunge in oil price that began in mid-2014. In political terms, the government’s slow movement towards minimal reforms seemed in tune with a general disengagement from the political process among most Algerians. But this year has been different. Protests began in February when it was announced that President Bouteflika, in office since 1999 but rarely seen in public since suffering a stroke in 2013, would stand for a fifth presidential term in April. As we note on the Algeria country page, as the demonstrations grew in size, army commander General Ahmed Gaid Salah intervened to force Bouteflika’s resignation at the start of April. The speaker of the upper house, Abdelkader Bensalah, became interim president and rescheduled the elections for July 4. But as the demonstrators gained momentum, their targets expanded beyond the tight circle around the former president to encompass Bensalah and the new government appointed by Bouteflika before his resignation. At the same time, however, with the initial aim of removing Bouteflika now achieved, the pressure for reform appeared to become more diffuse and General Gaid Salah made clear that the army intended to support the interim president in planning for the July elections. He also indicated a readiness to see the arrest of some of the regime’s inner circle and minimise the use of force against the protesters so long as they did not target the military. But by May, the anti-regime protest movement, increasingly motivated by students although avoiding high-profile leaders who could be easily neutralised, rejected the idea of new elections and instead demanded a whole new political system for the country. At the start of June, as the country’s constitutional council called off the July 4 election due to a lack of candidates, President Bensalah’s call for dialogue between the opposition and the regime triggered one of the largest demonstrations so far in Algiers at which the crowds demanded his resignation.
Although he may well give up more members of the political elite, with two former prime ministers already in detention on corruption charges along with a few well-connected businessmen, this seems unlikely to halt the protest movement. With the protesters now seeing little difference between political figures from the Bouteflika era and those now commanding the military, the scene has been set for a showdown with the security forces that could result in considerable violence and significant uncertainty. Whoever ends up taking charge of the country’s affairs once the current crisis has been resolved will face the challenge of squaring declining oil and gas revenues with popular demands for higher public spending. The relationship between oil revenues and stable governance constitutes an increasingly significant risk, leading investors to delay major projects and putting greater pressure on the dinar. Companies in the oil and gas sector face a particular challenge. Algeria’s need for new investment will increase quickly and market access is likely to improve, yet the degree of political risk they face is also likely to rise. The country’s crude oil production has been declining steadily for years while domestic consumption of both oil and gas has continued to rise, leaving less for export. Relatively high oil prices between 2002 and 2014 enabled Algeria to build up its financial reserves but these have been heavily depleted since the 2014 oil price collapse, falling from 200 billion dollars in mid-2014 to around 75 billion dollars now. The government responded to the fall in revenue from oil and gas, which still makes up more than 90% of export income and 60% of budget revenue, by drawing down financial reserves, reining in public expenditure, and restricting imports. In late 2017, it began a five-year programme of borrowing from the central bank. This unconventional approach could be supplemented by other forms of financing for Algeria's current account and fiscal deficits but, while Algeria has hardly any external debt, borrowing from international capital markets would be prohibitively expensive given the risks associated with the current political circumstances. Although turning to the IMF would be an obvious answer, the government and interim president lack the authority to embark on negotiations for an assistance programme. Any such initiative would be attacked by the protest movement as a bid to bail out a corrupt regime on the backs of ordinary Algerians, who would face the impact of a devalued currency and sharp cuts in subsidies. If the IMF is not the answer, then Beijing could be. Chinese companies are involved in dozens of major construction projects in Algeria, and the price of Chinese assistance could be preferential access to the country’s hydrocarbons sector. Although pushed into the background, these economic realities will not be altered by a change of leadership or even a constitutional transformation of the political system. Investors need a degree of confidence in the governance of a country, particularly one seeking to attach new investment into a mature sector.
It will be crucial to maintain the credibility of Sonatrach, the state oil company, although this has been made harder by the removal of its reform-minded CEO in April as part of a wider purge of officials seen as close to the former president. At the same time, a widely welcomed draft revision of the hydrocarbons law that would allow companies to negotiate production-sharing agreements is now in limbo with no indication of when, or if, it will be implemented. In addition, although Algeria's huge shale gas resources are of interest to the major players in the sector, it is not clear how, in the absence of effective governance, the strong popular opposition to fracking can be reconciled with commercial interests that would bring in more revenue.
In the meantime, some of Algeria's most influential businessmen have been detained and charged with offences ranging from attempting to smuggle out foreign currency to corruptly obtaining state contracts. The risk to legitimate business from this rush to judgement has raised concerns about the integrity of the judicial process, adding another disincentive to private investment.
The situation in Algeria represents an aspect of political risk that stems from instability, uncertainty and unpredictability. In the previous edition of the Index, we looked at another strand of political risk that can exist when a government is sufficiently well entrenched to make major policy changes that can upset the commercial environment for whole sectors of the economy. In the previous edition of the Index we looked at this aspect of political risk in the context of President Andres Manuel Lopez Obrador (AMLO)’s new administration in Mexico. In that context, it is interesting to note that Mexico’s economy took an unexpected plunge during the first quarter of 2019, contracting by 0.2% quarter-on-quarter, with the slowdown becoming more widespread amid declines in industrial production and services. The major international financial institutions, the country’s central bank and even the finance ministry have all reduced their growth forecasts for this year to around 1.6%. AMLO’s promise of an average annual growth rate of 4% over his six-year term is looking increasingly unobtainable given the uncertainty surrounding the future direction of his policies, particularly in the crucial energy sector. Public spending cuts will hit investment projects and private investment, hampered by falling confidence and rising political risk, will not be able to fill the gap. This is particularly worrying in Mexico where many planned projects rely heavily on private equity, given the government's limited ability to fund large-scale infrastructure projects; the value of private investment in Mexico is more than six times that of its public counterpart. As may soon be true in Algeria, the situation in Mexico shows that a rise in political risk can quickly translate into tangible economic consequences.
Long-time followers of the WillisTowersWatson Political Risk Index have become used to movement within the Index occurring on several different levels at once. Individual categories of risk can move up or down at differing rates within a single country, and the overall direction of risk can shift from year to year as macro factors such as energy prices, interest rates, and electoral timetables have an impact. But recent editions of the Index have indicated a clear trend in which more countries saw their overall risk score rise, indicating an increase in political risk. In mid-2018, we still had 20 countries whose scores were falling, denoting less risk, compared to 14 whose scores were rising. But by the final edition of 2018, the Index had moved firmly into negative territory as 18 countries posted a rising score while only 13 saw their overall scores go down. In our first edition of 2019, the number of countries with rising scores had risen to 25.
The current edition shows the tide of concern ebbing slightly. This is encouraging, although there are reasons to think that what we are seeing now is more of a lull than a change of direction. The countries with a falling risk score (19) now outnumber those with a rising score (17), with four having scores unchanged from last time.
The overall score for each country is derived from the ratings for five individual risk categories: expropriation, political violence, terrorism, exchange transfer and trade sanctions, and sovereign default. In this edition, only in two categories – exchange transfer and trade sanctions risk, and sovereign default risk – do countries with falling risk outnumber those with rising risk and do so only by the smallest of margins. It is worth noting here that it is rare to find a country that has all of its sub-categories moving in the same direction, with most posting a mix of rising, falling, and stable numbers; to have two examples in one edition, as we have this time with Argentina and India, is extremely unusual. These internal dynamics tend to reduce the instances of large or sudden movements once we have applied the algorithm that converts these individual category scores into a single overall number for each country. As a result, movements of country scores by one or two points in either direction may appear small but represent a considerable degree of change. A headline overview of the country scores in this edition must start with Venezuela again topping the Index as the only country in the Extreme Risk category. Its score has risen marginally from 91 to 92 as the country appears stalled on the cusp of change. Algeria has the sharpest rise in overall risk, up four points on the wave of protest that threatens to sweep away the army leadership along with associates of the Bouteflika regime. After that, with a rise of two points, come Angola and Brazil. Among the countries posting a fall of two points are Ethiopia, Senegal and Vietnam. Zimbabwe also drops by two but remains in the High-Risk category. It is worth noting that two countries whose scores were up by three points last time, Iran and Mexico, are both up by one point this time – a slowing of momentum, perhaps, but not a change of direction. Drilling down from the overall country scores to the individual risk categories in the current edition, a look at the expropriation category confirms the idea that the gap between countries with rising and falling scores, which had been widening precipitously in recent editions, is narrowing again. Consequently, 17 countries have rising scores, 16 are falling and seven remain unchanged. The category is slightly quieter, too. Last time the scores ranged from +9 to -3, but this time the largest mover is Algeria, up five points on the risk that a wide range of businesses may be affected by a re-examination of contracts concluded under the Bouteflika regime. Six other countries are up by three points. These include Zambia and Brazil, each of which sees the mining sector under particular pressure, and Argentina, where the government has frozen prices on basic consumer goods and transport costs. By contrast, 11 countries show a drop of two points, while Zimbabwe is down by three as more exceptions are made to the country’s indigenous ownership requirements. In the political violence category, 20 countries post rising scores, only one fewer than last time, but a greater number (13) now have falling scores. Algeria again heads the table, up eight points. Grouped behind on a rise of three points are Brazil, Turkey and Venezuela. All of these have seen an uptick in political violence in recent months but have the potential for an escalation of tensions during the second half of the year. Among those with falling scores, both Senegal and Nigeria are down by four points after their recent elections. However, South Africa and Ukraine, which have also just completed presidential elections, are only down by two points.
The trend towards greater risk is most apparent in the political violence category. Here 21 countries post rising scores with just nine falling, compared to 15 and 13 in the last edition. Algeria, Indonesia and Senegal all see their scores up by four points as each one contends with the possibility of election-related violence. The expectation is that these scores will go down once the election period has passed, but the elevated numbers convey the heightened risk at present even in a country like Senegal, which rarely features in this section.
The positive side of the ledger always requires a degree of caution in the political violence category because a falling score can sometimes result from an increase in government control rather than a reduction in political tensions. However, the four-point falls for Senegal and Nigeria indicate that in both cases a potentially tricky election period has been negotiated successfully, although the situations in South Africa and Ukraine, which have also just completed presidential elections with little violence, mean that they are down by two points.
The terrorism category is split, with 11 countries with rising scores and the same number falling. The degree of movement within the countries is relatively restrained this time. Venezuela, up by three, is the largest riser while Egypt has the largest drop, also three points, as the army extends its control in Sinai and its ability to pre-empt attacks elsewhere. Nigeria’s score is down by three, partly on reports of discord in one of the more active splinter groups from Boko Haram. The terrorism risk is up by two points in both Myanmar and the Philippines, although in both cases the primary areas of concern are away from the main urban and economic centres. By contrast, Argentina is up two largely on concerns about the possibility of further small-scale incidents within Buenos Aires. Turning to the category covering exchange transfer and trade sanctions, we find 22 countries with a rising score compared to only ten that are falling. Algeria is again the leader, up four points on making it harder to move funds out of the country and the possibility, currently no more than that, of the central bank considering capital controls if the political situation threatens to put unsustainable pressure on the currency. India is up by three points on fears that the central bank, under its new governor, may have experienced undue political pressure to cut interest rates ahead of the elections. South Africa’s score is also up, by two points, on concerns that the central bank’s remit may have broadened out from a concentration on inflation targeting. Among the other countries up by two points are Bangladesh (weakening banking sector) and Pakistan (currency weakness) while Iran and Venezuela are both up by two points in a reflection of sanctions-related concerns. On the positive side, seven countries fall by two points, including Colombia, Ecuador (where commitment to dollarization continues), Thailand (strong currency), and Egypt, which has won praise for its unwavering implementation of the conditions attached to its IMF loan. The final category, sovereign default risk, usually contains a large number of non-moving countries and this time it is 17. However, those with rising scores (14) clearly outnumber those that are falling (9). Among those up by two points are Argentina and Nigeria, both of which are seeing the cost of servicing foreign debt continue to grow; Colombia, where the cost of coping with Venezuelan migrants is putting the fiscal deficit target in jeopardy; and Iran and Turkey, where budget deficits have soared during the current fiscal year. By contrast, Ecuador is down by three as a government efficiency drive complements help from the IMF. Vietnam’s score is also down as public debt falls.
The degree of movement within the countries is relatively restrained this time. Venezuela, up by three, is the largest riser while Egypt has the largest drop, also three points, as the army extends its control in Sinai and its ability to pre-empt attacks elsewhere.
Finally, 2019 has already been a year of noteworthy elections. India, the world’s largest democracy, took five weeks to complete its voting, while Indonesia managed to elect its president, legislature, and regional governments all in one day, and Ukrainians chose a distinctly novice, and indeed novel, president. Argentina expects a critical presidential election later this year, while Istanbul reruns its municipal elections, Ukraine may or may not have parliamentary elections, Russians go to the polls in September, and Uzbekistan prepares for a freer than usual legislative election at the end of the year. In the coming weeks, we will continue to monitor the factors that affect political risk in these countries as well as all the others in the WillisTowersWatson Political Risk Index, and we look forward to bringing you the next edition.