political risk outlook investment pack - august 2014

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www.politicalmonitor.com.au Poli%cal risk outlook – investment pack August 2014

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The Political Monitor August political risk outlook investment pack includes the Australian Political Risk Index, political risk spreads, country risk analysis for China, India and Indonesia, an examination of geo-political events on oil prices and a review of political risk across Africa.

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  • 1. www.politicalmonitor.com.au! Poli%calriskoutlookinvestmentpack August2014

2. OUTLINE! This presentation provides a summary of Political Monitors monthly Political risk outlook investment pack. It includes Political Monitors proprietary risk scores and indices and domestic, regional and global analysis of the commercial implications of political trends and events. ! The full pack is released to subscribers at the beginning of each month and this summary version is released for general distribution a minimum of one week later.! To nd out more about subscribing to the full monthly pack please contact:! ! Damian Karmelich ! ! ! ! ! ! !Steve Cusworth! Partner Sydney ! ! ! ! ! ! !Partner - Melbourne! p. 0407 772 548 ! ! ! ! ! ! !p. 0417 178 697! e. [email protected] ! ! !e. [email protected] ! 3. CONTENTS! Australian Political Risk Outlook p. 4! Asia Political Risk Outlook .. p. 7! Country in focus: China ... ..... ....... p. 8! Country in focus: India . p. 9! Country in focus: Indonesia . ..... ... p. 10! Global issues ........ p. 11! Appendix 1 Australian Political Risk Index methodology........ p. 17! Appendix 2 Political risk spread methodology .. p. 18! Appendix 2 - Economic & investment impact of political and social instability .. p. 19! ! ! ! ! !! ! Political risk outlook! 3! 4. AUSTRALIANPOLITICALRISKOUTLOOK 5. AUSTRALIAN POLITICAL RISK INDEX domestic & global events pushed the index to its second highest level in 10 months! Political risk outlook! 5! 0 2 4 6 8 10 12 14 16 18 Poli%calUncertaintyScore Poli%calRiskIndex 6. AUSTRALIAN POLITICAL RISK INDEX domestic & global events pushed the index to its second highest level in 10 months! Political risk outlook! 6! DebateoverthecarbontaxanduncertaintyaboutthedetailoftheAbboFGovernmentsDirectAc%on policyhelpedpushthepoli%calriskindextoitssecondhighestlevelin10months. Addingtothehighlevelofuncertaintyandunderlyingvola%litywerethefailureoftheGovernmentto garnersupportforkeycomponentsofitsbudgetandthegrowingrealisa%onbymarketsthatClive PalmerandhisPalmerUnitedParty(PUP)wereincreasinglywillingtousetheirbalanceofpowerinthe Senatetofrustrategovernmentlegisla%oninpursuitoftheirownobjec%ves.Whetherbydesignorlack ofexperiencethenewSenatorshavecreatedasenseofconfusionaroundthefutureofkeypiecesof governmentlegisla%on. Geo-poli%caleventsalsoweighedontheindexwithuncertaintygrowingaboutthelong-term implica%onsofWesternsanc%onsagainstRussia,theimpactoftheongoingturmoilinUkraineonglobal energysuppliesandprices,andeventsintheMiddleEastthreateningtopreoccupyifnotengulfkey actorsintheMiddleEast. ThefailureofWesternpowersandIrantomakesubstan%alprogressinnuclearnego%a%onshasalso beennotedbymarketsascompaniesaroundtheworldwaittoseewhetherasizeablenewmarketwill befurtheropenedtotheworldorwillonceagainbeconfrontedbyeconomydestroyingsanc%ons. NarendraModisfailuretomoveasfarorfastoneconomicreformasmanyhadhopedanduncertainty abouttheoutcomeofthepresiden%alelec%oninIndonesiahavealsoaddedtopoli%caluncertaintyin Australiaandthesurroundingregion. 7. ASIAPOLITICALRISKOUTLOOK 8. COUNTRYINFOCUS:CHINAANTI-CORRUPTION CAMPAIGNSIGNALSENDOFCONSENSUSLEADERSHIP PresidentXiJinpingsan%-corrup%ondriveis largelytargetedatfac%onalopponentsandtheir supportersandisthemostaggressivecampaign ofitskindin20years. Marketshavebeenslowtounderstandthe importofthiscampaignandtheimplica%onsfor thepoli%caldynamicintheworldssecond largesteconomy. Thean%-corrup%ondriveisalsoanaFemptto addressoneoftheprimaryconcernsofthe public,par%cularlywithregardtolocalocials, andillustratethenewleadershipsanitywith theconcernsofordinarypeople. Thelatestcampaigncomesasslowinggrowth increasesthepressureongovernmentto addressincomeinequalityandminimisejob lossesinthetransi%onfromaninvestment driventoconsumerfocusedeconomy. Political risk outlook! 8! 30 35 40 45 50 55 60 2/04/2014 2/05/2014 2/06/2014 2/07/2014 Chinapoli%calriskspread 9. COUNTRYINFOCUS:INDIAMARKETSLOOKINGFOR MORETHANCHANGEOFGOVERNMENT WhileIndiasriskspreadhasnarrowedslightly overrecentweeksinvestorsremainconcerned aboutpoli%calriskinthecountry. NewPrimeMinisterNarendraModihasfailedto meetearlyexpecta%onsoffar-reaching economicreformsandinsteadhassignaledheis likelytotakeaslowerapproach. Anumberoftradedeals,includingtheDoha round,areatriskasthenewgovernment appearsreluctanttoexposeIndiasagricultural sectortoextensiveliberalisa%on. Afailuretotackleanumberofeconomic challengeswilllikelyresultinafurtherwidening ofIndiaspoli%calriskspreadasgrowing discontentamongthecountrysyouthexposes Indiatotheriskofsocialupheaval. Political risk outlook! 9! 170 175 180 185 190 195 2/04/2014 2/05/2014 2/06/2014 2/07/2014 Indiapoli%calriskspread 57.5 58.5 59.5 60.5 61.5 62.5 63.5 USD:INR 10. COUNTRYINFOCUS:INDONESIAMARKETSGROW WARYOFUNCERTAINELECTORALOUTCOME Uncertaintysurroundingtheoutcomeofthe presiden%alelec%oncontributedtoawidening poli%calriskspreadoverrecentweeks. WhileJokoWidodosvictorynowappearsassured thereremainsconcernaboutthenewPresidents abilitytocommandagoverningmajorityinthe Parliamentwherehewillbedependentupona coali%onofpar%estodeliverlegisla%veoutcomes. Theoutcomeoftheparliamentaryelec%onisa reminderofIndonesiasfracturedpoli%cs.The countryisalreadyexperiencinghighlevelsof economicna%onalismandWidodospopulist approachmayaddtoexis%ngpoli%calrisks. Investorswillneedtomonitoreventscloselyas Widodoseekstobalancethecompe%nginterestsof interna%onalinvestorsandhisdomes%c cons%tuency.Histaskwillbemademoredicultby theneedtoconfrontbureaucra%ccorrup%onacross thecountry. Political risk outlook! 10! 145 150 155 160 165 170 175 2/04/2014 2/05/2014 2/06/2014 2/07/2014 Indonesiapoli%calriskspread 10000 10500 11000 11500 12000 12500 2013-08-01 2013-09-01 2013-10-01 2013-11-01 2013-12-01 2014-01-01 2014-02-01 2014-03-01 2014-04-01 2014-05-01 2014-06-01 2014-07-01 2014-08-01 USD:IDR 11. GLOBALISSUES 12. THEPOLITICSOFOILMARKETSCONFUSEPOLITICAL EVENTSWITHPOLITICALRISK Marketsini%allyreactednervouslytoeventsin UkraineandtheMiddleEastwithfearsthatoilprices wouldspikeinresponsetogeo-poli%calturmoil. However,asPoli%calMonitorforecastinJunemarkets wererespondingtobroad-basedgeo-poli%calevents andnotpayingcloseenoughaFen%ontocountry specicevents. Sanc%onsagainstRussiaareunlikelytoimpactitsoil salesnorpushpriceshigherasEuropealreadysources largevolumesfromelsewhereandmuchofRussiasoil goestocountriesnotimposingsanc%ons,including China. Elsewhere,theIsraeli-Pales%nianconictinvolvestwo non-oilproducinggroupswhileeventsinIraqareyet toimpactitsoilproduc%onalthoughaFemptsby Kurdishauthori%estoselloildirecttotheworldshould bewatched. Meanwhile,growingUSsupplycon%nuestorelieve pressureonglobaldemand. ! ! ! !! ! Political risk outlook! 12! 85 90 95 100 105 110 115 120 Brentcrude&WTI WTI Brent 0 2 4 6 8 10 12 Brentcrude-WTIspread 13. THEBATTLEFORAFRICAAUSTRALIANINVESTMENT ONANINCREASINGLYRISKYCONTINENT AustraliahasconsiderableexposuretoAfrica. Intheminingsectorthereisaround200 Australiancompaniesinvolvedinover700 projectsacross37Africancountries. Onein20Australiancompanieslistedonthe AustralianSecuri%esExchange(ASX)hasan investmentinAfrica,andAfricahoststhe largestnumberofAustralianminingprojectsin anyregionoutsideAustralia,ataround40%of alloverseasminingprojects. Furthermore,AustralianFDIinAfricahas grown75percentsince2006. Butpoli%calrisksareontheriseresul%ngin increasingconictacrossthecon%nent. ! ! Political risk outlook! 13! 14. THEBATTLEFORAFRICAAUSTRALIANINVESTMENT ONANINCREASINGLYRISKYCONTINENT Theincreaseinconictandtherisktoinvestorsis aconsequenceoffourbroadpoli%caltrends. Extremismthereturnofextremistgroupswaging warandengaginginterrorismhavehitattheheart ofsomeofAfricasmostimportanteconomies includingKenyaandNigeria. Weakbordershavefacilitatedtheeasy movementofextremistgroupsandweapons.The aFackonaKenyanshoppingmallin2013was commiFedbygroupsbasedinSomalia. Inter-state&ethnicconictisretardingthe growthofanumberofeconomiesincludingoilrich SouthSudan. Weakgovernanceallowsrampantcorrup%on, whichaddstosocialdiscordinaregionwhere70% ofthepopula%onliveonlessthan$2perday.This alsoretardsthegrowthofanemergingmiddle class. ! ! Political risk outlook! 14! 15. Detailed analysis on these and other political risks confronting investors can be found at www.politicalmonitor.com.au! ! To nd out more contact:! ! DamianKarmelich SteveCusworth Partner-Sydney Partner-Melbourne p.0407772548 p.0417178697 e.karmelichd@poli%calmonitor.com,au e.cusworths@poli%calmonitor.com.au! ! About Political Monitor! Political Monitor is a political risk research and advisory rm. Our analysis provides insight into the implications of political risk for commercial valuations, asset selection, investment decisions, strategic planning and operational decisions. ! ! Political risk outlook! 15! 16. DISCLAIMER & COPYRIGHT! Disclaimer! Information in this document is subject to change without notice and does not represent a commitment on the part of Seller.! Seller does not warrant the accuracy, completeness or timeliness of any of the data and/or programs (Information) available within the report. The Information is provided as is without warranty of any kind, express or implied, including, but not limited to, implied warranties of merchantability, tness for a particular purpose, title or non-infringement.! In no event will Seller or its afliates be liable to any party for any direct, indirect, special, consequential or other damages for any use of or reliance upon the Information found within the report, or on any other reference documentation, including, without limitation, lost prots, business interruption, loss of programs or other data, even if Seller is expressly advised of the possibility of such damages.! The disclaimer is in addition to the specic terms and conditions that apply to the products or services offered by Seller.! Copyright! Copyright Political Monitor Pty Ltd 2014. This document is copyright and contains condential information that is the property of Seller. Except for the purposes of executing or applying this report, no part of this document may be copied, stored in a retrieval system or divulged to any other party without written permission. Such rights are reserved in all media.! Intellectual property rights associated with the methodology applied in arriving at this document, including templates and models contained there in, reside with Political Monitor Pty Ltd, excepting client information it contains that is demonstrably proprietary to the client or covered by an agreement or contract dening it as such.! No part of this report may be reproduced, transmitted, stored in a retrieval system, or translated into any language in any form by any means, without the written permission of Political Monitor Pty Ltd.! Political Monitor Pty Ltd 2014. All Rights Reserved . ACN 166 162 572.! Political risk outlook! 16! 17. APPENDIX1-AUSTRALIANPOLITICALRISKINDEX METHODOLOGY ThePoli%calMonitorAustralianPoli2calRiskIndexisadynamicindexthattracksthe levelofpolicyuncertaintyinAustraliarelyingonanumberofvariablesincluding marketvola%lityandthedispersionofprivatesectoreconomicforecasts.Theindexis refresheddailyprovidinganuptodategaugeofpoli%calandpolicyuncertainty. ! ! ! ! ! Political risk outlook! 17! 18. APPENDIX2POLITICALRISKSPREADS ThePoli%calMonitorpoli%calriskspreadisaproprietaryscorethatquan%esthecomponentofa countryssovereignriskspread(thedierencebetweenyieldson10yearUSTreasuriesand comparabledebtinrespec%vecountries)aFributabletopoli%calfactorssuchasstabilityof government,judicialindependence,corrup%on,povertylevels,foodsecurityandarangeof demographicfactorssuchasthesizeofthepopula%onundertheageof30. Thepoli%calriskspreadallowsinvestorstomakeaclearerdis%nc%onbetweenthedierenttypesof riskthatinuencesovereignyields.Thisapproachmeansinvestorscandis%nguishbetweenpoli%cal risksandmoregeneraleconomicriskswhenassessingcountryspecicinvestments. Thescoresarerefresheddailyforcountrieswherepubliclyavailabledataonbondyieldsare available.Theyaregeneralinnatureanddonottakeintoaccountthecapacityofindividualrmsto manageandmi%gatepoli%calriskineachmarket. Poli%calMonitorprovidespoli%calriskspreadsfor15na%onsacrossAsiaand7inwhichAustralias majorminingcompanieshaveopera%ons. ! ! ! !! ! Political risk outlook! 18! 19. APPENDIX3-ECONOMIC&INVESTMENTIMPACTOF POLITICAL&SOCIALINSTABILITYDOESITMATTER? Poli%calriskisthesecondrankedconcernforpubliclytradedcompanies"Lookingahead,investors con%nuetobewaryabouttheeectsofsystemicrisk,poli%csandregula%onontheworld'smarketsand howthey'llperform.(BNYMellon,GlobalTrendsinInvestorRela2ons,2014). Ingeneralpoli%calinstabilityresultsin: (a)lowereconomicgrowth(Aisen&Veiga,2013) (b)reducedprivatesectorinvestment(Alesina&PeroK) (c)increasedina%onlevels&vola%lity(Aisen&Veiga,2008). Theeconomiceectsofpoli%cal&socialinstabilityremainforanobservableperiodof23years.Thekey determinantofwhethertheeectofinstabilityceasesatthatpointisthespeedwithwhichcountries implementreforms&improvegovernance(Bernal-Verdugo,Furceri&Guillaume,IMFWorkingPaper, 2013). Anincreaseineconomicpolicyuncertaintyforeshadowsadeclineineconomicgrowthandemploymentin thefollowingmonths(Baker,Bloom&Davis,EPU). TheInterna%onalMonetaryFund(IMF)es%matestheeconomiclosstoLibya,Egypt,Tunisia,Syria,Yemen, andBahrainin2011atUSD$20.56billionasaresultofpoli%calandsocialconict. ! ! ! ! !! Political risk outlook! 19!