This summary provides an overview of political risk ratings changes and trends discussed in the Q3 2016 political risk quarterly report from Aon. Four countries saw deteriorations in their overall risk ratings - Azerbaijan, Djibouti, Kuwait, and Zimbabwe. Only Madagascar improved, being upgraded to medium-high risk. Deteriorations were driven by factors like increased political violence, regional conflicts, weakened fiscal situations, and instability. Asia was noted as seeing modestly improving ratings, while challenges remain around infrastructure investment programs in countries like India, Indonesia, and the Philippines. Risks in Latin America are also trending positively overall despite issues in Venezuela. The Middle East and Africa continue facing pressure from low oil prices and conflicts.

1. Aon Risk Solutions
Global Broking Centre | Crisis Management
Risk. Reinsurance. Human Resources.
PoliticalRisk
Quarterly
Q3 2016
Summary
This quarter, four countries experienced a deterioration in their overall
country risk ratings and just one saw an improvement; a reversal of the
trend of improvement we have seen in recent quarters.
Azerbaijan deteriorated from medium-high to high risk overall, due to
heightened risk of political violence. This has been driven by a number of
regional conflicts, most notably the conflict with Armenia over the status of
the Nagorno-Karabakh region.
Djibouti also saw its overall risk level deteriorate, from medium-high to
high. This is due to the international spill-over of risks from neighbouring
Somalia and the large influx of refugees fleeing the strife in Yemen.
Overall political risk in Kuwait increased to medium; largely due to the
government’s financial position weakening as it adjusts to the new oil price
environment. This downward trend follows past downgrades in economic
risks for many oil exporting nations in the past two years, including most of
Kuwait’s GCC peers.
Finally, Zimbabwe has deteriorated further and is now considered a very
high risk country, resulting from the weakened fiscal situation and politi-
cal instability (by the latter measure, Zimbabwe is now one of the weakest
countries in the world).
The one country to improve this quarter was Madagascar, which is now
considered a medium-high risk. It has experienced small improvements across
a range of economic risks, including the risk of sovereign non-payment and the
ability of the government to stimulate the economy.
Ratingchanges
Deterioration
Azerbaijan
Djibouti
Kuwait
Zimbabwe
Improvement
Madagascar
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2. Political Risk Quarterly | Crisis Management | Q3 2016 2
Regional overview
Asia
Political risk ratings in Asia have been modestly improving. In the last quarter, there have been some important
breakthroughs in economic policy in India and Indonesia. This suggests a reduction in economic risk and greater
resilience; a theme we highlight in this quarter’s special feature. These economic policy trends also reflect power
consolidation, which raises some longer-term challenges in the region. In general, weaker global trade, a change in
composition of China’s import demand and some increase in government intervention suggest challenges for the
region.This is especially significant as local economies will need to rely more extensively on domestic demand and
investment in fuel growth.
Increased military spending and nationalist sentiment in East and Southeast Asia have the potential to increase
cross-border disputes and negatively impact trade. So far, the Rodrigo Duterte administration has largely left
economic policy in the Philippines unchanged, which has diminished some regional political concerns. The
government’s focus on criminal justice, however, threatens the consistency of judicial rulings, which will pose
risks to business. Along with weaker growth, the law-and-order focus could also prompt the government to
impose new restrictions on foreign investors. Meanwhile, recent economic reforms in Indonesia have done little
to overturn anti-business policies in the mining sector.
In China, the Jinping government remains focussed on consolidating power rather than pursuing economic
reform. This will increase uncertainty around the outcome of legal and political rulings affecting the business
environment, while potentially leading to disagreements between rulings made at the federal and provincial
level. The focus on short-term support for growth, including construction, has increased China’s reliance on
finance. This strategy risks greater economic volatility in coming years as the country increases existing debt
levels; already among the highest in the world. There is little sign, however, that the government is willing to pass
on losses from past investments given the associated political costs.
Meanwhile, in India, there have been some improvements to the reform process, including the passage of the
important Goods and Services Tax. Significant implementation challenges, however, remain.
Eastern Europe & CIS
There has been little change to the high level of political risk recorded across many of the CIS and Caucasus
countries rated by the risk map. The conflict in the Ukraine has increased in intensity this summer. There is,
however, only limited risk of this spreading to neighbouring regional economies. The probability of new
sanctions on Russia from either the US or the European Union is therefore relatively low. Domestically in the
Ukraine there has been very little progress on implementation of the Minsk II agreement, suggesting that the
chance of any reduction in political risk in the country is minimal in the immediate future. This will continue to
undermine investment, particularly in the banking and energy sectors.
Meanwhile, economic and social conditions in Russia remain stable. President Putin appears to have refocused on
domestic economic policy in the wake of a busy election cycle (parliamentary elections this autumn).
Russia remains challenging for foreign investors as the government continues its drive to reduce the level of
imports and its dependence on foreign capital. Although the economy seems likely to come out of recession in
the second half of 2016, its expansion will be modest. The extended period of economic contraction has weighed
heavily on the income of CIS countries, such as Armenia, Kazakhstan, Kyrgyzstan, Turkmenistan and Uzbekistan.
Remittances to these countries have weakened, exacerbating exchange transfer and sovereign non-payment risks.
The de-escalation of the standoff between Russia and Turkey could provide some space to address regional issues,
such as the frozen conflict in Nagorno-Karabakh region.

3. Political Risk Quarterly | Crisis Management | Q3 2016 3
Regional overview cont.
Latin America
The positive trends in Latin America and the Caribbean that we have noted in recent quarters remain on track.
Political risk in Brazil continues to improve with Michel Temer now confirmed as President following the
impeachment of former President Dilma Rousseff. Changes in the policy mix that his economic team have already
made – such as fiscal cuts – have improved confidence, while high-frequency indicators suggest the worst of
the recession is over. For longer-term investors, however, political risk will remain at a medium level; persistent
challenges in Brazil’s business environment and difficulties in remedying years of excess government intervention
in the economy prevail. Although the Temer administration will be in a much better position to implement badly
needed structural and fiscal reforms, Congress will remain fragmented and the ruling coalition fragile. The Petrobras
and other corruption investigations continue to be a potential threat to the new regime.
A growth recovery in 2017 is possible, but will depend on the government’s capacity to implement key reforms.
Brazil could well emerge stronger from the crisis, which has revealed a largely independent judicial system. Debt
dynamics will remain a concern in the medium term.
Argentina’s country risk rating should continue to improve. The correction of macro and micro imbalances continues
in key areas, such as currency and capital controls, taxation and fiscal and monetary policy. Inflation will finally start
to decelerate from very high to high levels in the second half of the year, once the effect of steep tariff adjustments
fades away. This will allow the central bank to continue easing and supporting an investment-led recovery. The main
challenge remains bringing down a high primary fiscal deficit. So far, although the government has announced
its intentions to reduce the fiscal gap, it has taken few measures to cut expenditures. Simultaneously, political and
judicial challenges to austerity measures are increasing.
Venezuela is the one noticeable source of deterioration in the region. Political violence remains high (and rising),
along with all other elements of political risk. The opposition has started to execute its plan to remove Nicolas
Maduro from power, but currently lacks sufficient support. Maduro’s government is likely to continue prioritising
paying external debt over everything else, which means imports will reduce further, increasing the shortage of basic
goods and fuelling domestic violence. There could be some spill-overs to neighbours, such as Colombia.
Middle East & North Africa
MENA remains home to many of the highest-risk countries in the world, with more deterioration in individual risk
icons than improvements this quarter. There was only one overall country risk rating change; a downgrade for
Kuwait. Despite rebounding from their 10-year low at the start of the year, oil prices remain weak. This, combined
with persistent regional conflicts, continue to place pressure on the resilience of key economies and institutions in
the region. There are few signs to suggest that this general trend towards higher political risk is likely to reverse in
the coming quarters.
International involvement in the Syrian conflict has been greatly reduced. ISIS, however, continues to pose a
threat both in the war-torn country, its close neighbours (with increased activity in Iraq and Saudi Arabia) and
globally. The ongoing conflicts, not only in Syria but also Iraq and Yemen, will maintain a focus on military and
security spending. In light of lower government revenues, this will perpetuate sovereign non-payment risk.
Economic pressure on regional oil producers will continue until oil prices significantly rebound or policy
adjustments are made. This will have a greater impact on countries like Iraq, Libya and Algeria who are still
suffering from severe political and security crises. The richer and more stable countries in the Gulf Cooperation
Council are in a stronger position.
Energy importers generally have stable, although high, country risk ratings, but will suffer from difficulties in
implementing reforms (Tunisia) and a general tightening of regional financial conditions. Egypt has finally turned
to the IMF for assistance amid an acute FX shortage. Exchange transfer risks will likely increase as the pound is
expected to devalue further and stricter limits imposed on use of credit cards abroad. These policies should be
short-term challenging, but long-term positive.

4. Political Risk Quarterly | Crisis Management | Q3 2016 4
Regional overview cont.
Sub-Saharan Africa
The picture is mixed across Sub-Saharan Africa. As in the MENA region, weaker commodity prices are exerting
pressure on regional producers, generally reinforcing the high levels of country risk. Oil and metal producers, such
as Ghana, Mozambique, Nigeria, Uganda and Zambia, have seen some country risk factors deteriorate, including
legal and regulatory and exchange transfer risks.
In Nigeria, the currency may have to weaken further to ensure economic stabilisation as existing capital restrictions
and thin liquidity continue to weigh on investor interest. A long delay in allowing the currency to adjust has helped
to cripple the non-oil economy; recovery is anticipated to occur very slowly through 2017. Implementation risks
around infrastructure remain significant.
Mozambique (where the political environment remains volatile), Uganda and Angola have all seen public-
sector arrears to the private sector increase. FX shortage and currency depreciations have heightened sovereign
non-payment and exchange transfer risks. Meanwhile, Uganda and Tanzania could suffer from further delays in
developing their oil and gas resources given the global energy-sector investment cuts.
By contrast, oil-importing nations in East Africa have experienced a modest reduction in risk. Notably Ethiopia
and Kenya’s outlooks have improved both politically and economically as a result of recent regulatory reforms and
reduced levels of political violence.
In the spotlight: Asian Infrastructure
This quarter, we look at the state of planned infrastructure investment programmes in key countries in South and
Southeast Asia and assess the impact they could have on the evolution of political risk.
Although institutional risks across the region are relatively stable and overall political risks have been falling, there
continue to be significant implementation risks around planned investment programmes. Such risks will limit the
resilience of these economies to global shocks—in particular, the structural slowdown in China.
Malaysia – Strong fundamentals continue to support the Malaysian economy despite the political noise around the
1MDB scandal. There has, however, been an increase in the reliance on government spending to support overall
growth, which poses questions about its sustainability in the long term. Capital investment growth slowed last
year as both private and public investment stalled during a period of greater political uncertainty. This picked up
modestly in the first half of 2016 and, despite some volatility in investment spending levels, the government appears
committed to infrastructure projects such as the Light Rail Transit (LRT) 3 project, Mass Rapid Transit (MRT) and
High Speed Rail projects. When completed, these should reduce the country’s exposure to shocks and increase the
ability of the government to foster domestic demand and diversify the country’s trade profile.
Indonesia – Indonesia has long suffered from a lack of adequate infrastructure. For years the government has
not prioritised infrastructure spending; struggling to spend the small amount allocated to it in national budgets.
Mismanagement, corruption and incompetence have also contributed to the tepid growth of infrastructure
development, preventing the economy from reaching its full potential.
Since President Joko Widodo came to power in October 2014 there has been a renewed focus on infrastructure.
Reform packages have been introduced to boost private investment and improve efficiency in the economy. These
have focussed on cutting red tape, reducing energy subsidies, improving the infrastructure tender process and
speeding up land-clearing. The government has also significantly raised the allocation for infrastructure spending in
both the 2015 and 2016 State Budgets. A recently announced tax amnesty is expected to attract additional revenue
of around Rp 165 trillion, most of which has been earmarked for infrastructure development. Financial and technical
resources, however, remain limited. For this reason, the government is focusing more on building public-private
partnerships and attracting private infrastructure investment, often from abroad. However, there are still a number of
key sectors that are relatively off-limits to foreigners.

5. Political Risk Quarterly | Crisis Management | Q3 2016 5
Philippines – Foreign direct investment (FDI) into the Philippines has traditionally lagged behind that of many of its
Southeast Asian neighbours, although the gap has begun to close. Remittances and wage-supported consumption,
however, remain the major drivers of economic growth.
Economic risks have generally been easing and the country is well positioned to cope with global shocks, including lower
reliance on trade with and demand from China. However, government expenditure, in particular public investment
in infrastructure development, was a point of contention for the previous Aquino administration. With the election
of President Rodrigo Duterte, infrastructure spending now appears to be on a more positive path given the focus his
economic team are expected to place on increasing infrastructure spending and attracting FDI. We expect to see some
further reductions in political risk and some improvement in the country’s balance sheet in the coming quarters.
India – India’s infrastructure needs are extensive. Investment, however, has remained insufficient for years due to
high interest rates and inflation, the glacial rate of coalition policy making, hefty fiscal deficits and a deepening
current account deficit.
The Narendra Modi government has been focused on infrastructure development and has increased spending in
recent national budgets. It has also begun shifting away from public-private partnerships to more direct investment,
while also taking steps to liberalise the country’s FDI policies.
The more meaningful improvements in reducing obstacles to investment have come at state rather than the national
level. Therefore whether local breakthroughs and pilot projects will be rolled out on a broader scale remains to
be seen. Domestic political risks, including political violence and crime, excessive bureaucracy and government
intervention in the economy remain impediments to successful implementation of policies. Meanwhile, the recent
pressure on the central bank governor, including public questioning of the policy regime, have raised concerns
about India’s commitment to inflation targeting and running stable macroeconomic policy. This presents significant
risks to private investment. Although we do not anticipate major changes in policy, we expect the gap between
policy making and policy implementation to continue, exacerbating the risks associated with investment-led
growth. In general, though, we envisage India moving in a more constructive direction, albeit slowly.
Country Risk Rating Overview
Improvement to country risk rating
Madagascar (medium-high) saw slight reductions in the risk of sovereign non-payment and risks around the in-
ability of the government to provide stimulus during a recession.
Deterioration in country risk rating
Azerbaijan (high) saw an increase in the risk of political violence, exchange transfer risk and banking sector vul-
nerability risk.
Djibouti (high) suffered an increase in the risk of political violence, banking sector vulnerability risk and risks aris-
ing from the government’s inability to stimulate the economy during a recession.
Kuwait (medium) saw increases in the risk of political violence, the risk of sovereign non-payment and banking
sector vulnerability risk.
Zimbabwe (very high) experienced an increase in risks around exchange transfer and banking sector vulnerability.

6. Vlad Bobko
Head of Crisis Management
vlad.bobko@aon.co.uk
Prateek Singh
Head of Political Risk Analytics
prateek.k.singh@aon.co.uk
Alice Black
Director, Political Risk & Structured Credit
alice.black@aon.co.uk
Gareth Hollins
Research Consultant, Roubini Global Economics
gareth.hollins@roubini.com
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