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The 2009 Commodity Crunch Risk Index Assessing Emerging Markets’ Vulnerability to Commodity Price Volatility
Copyright 2009 – Aon Corporation
Table of Contents On The Map. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Track Record. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 About This Year’s Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 The 20 Countries Most at Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Full Commodity Crunch Index Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Credit Crunch Risk Index
On The Map The 2009 Global Commodity Crunch Risk Index assesses the risk that emerging markets will suffer political or economic instability as a result of volatility in international commodity prices. The 2009 Political Risk Map displays one part of this Index: the exposure section, which is based on three indicators of risk. These three indicators are: (1) the degree to which the country’s economy is reliant on commodity exports; (2) the historical volatility of prices of this particular country’s exports; and (3) the country’s general risk of experiencing political instability or political violence. When global commodity prices fluctuate, these three factors, taken together, can create a dangerous cocktail. A high degree of economic volatility can feed rising political instability. When these issues combine, as they did during the commodity price boom and bust cycle of the 1970s and early 1980s, the repercussions for exposed countries can be severe. More details of the Index and its construction are provided in Section 3: About the Index.
Credit Crunch Risk Index
Page 1
Track Record For last year’s Political Risk Map, launched in January 2009, we produced a Credit Crunch Risk Index using a combination of quantitative indicators of exposure and resilience. Can such a quantitative approach be effective in predicting international political or economic instability? Obviously, there are limits to the analysis. Issues such as the ability of a particular leader to rise to the challenges posed by a crisis, or the possibility of an international bailout, are not factored into this analysis. However, these quantitative indicators can provide a useful assessment of the general ‘risk category’ into which a country falls. Most of the 15 riskiest countries in last year’s Credit Crunch Index have subsequently suffered downgrades of their sovereign credit risk ratings by one or more rating agencies or been put on negative watch (see the following page). This year, if global commodity prices continue to fall, as some analysts have forecast, we would expect our Commodity Crunch Index to have a similar value in assessing political and economic risks.
Last Year’s 15 Countries Most at Risk and Subsequent Rating Agency Actions 2008 Index Rank
Country
Rating Agency Actions
1
Latvia
Moody’s Downgrade 7 Nov 2008; S&P Downgrade 10 Nov 2008
2
Turkey
S&P Negative Outlook 13 Nov 2008
3
Hungary
Moody’s Downgrade 7 Nov 2008; S&P Downgrade 17 Nov 2008
4
Croatia
S&P Negative Outlook 27 Oct 2008
5
Lebanon
6
Lithuania
Moody’s Negative Outlook 7 Nov 2008; Fitch Downgrade 22 Dec 2008
7
Romania
S&P Downgrade 27 Oct 2008; Fitch Downgrade 9 Nov 2008
8
Estonia
Moody’s Negative Outlook 7 Nov 2008
9
Ghana
10
Slovenia
11
Costa Rica
12
Jordan
13
Bulgaria
Moody’s Negative Outlook 26 Sep 2008, Fitch Downgrade 10 Nov 2008
14
Jamaica
Fitch Downgrade 18 Nov 2008
15
Slovakia
Note that the above list of rating actions is not intended to be comprehensive.
Credit Crunch Risk Index
Page 2
About this Year’s Index The 2009 Global Commodity Crunch Risk Index is based on six indicators of exposure and resilience. The first three indicators assess Exposure: aspects of a country’s political or economic structure that increase exposure to volatility in global commodity prices. The second three indicators assess Resilience: aspects of a country’s economic policy or situation that may help a country to endure unexpected shocks. The three indicators of Exposure are: • Reliance on commodity exports: commodity exports as a percentage of a country’s total economic output. A measure of general economic dependence on commodity exports; • Volatility of export prices: historical price volatility of a country’s exports. This measure is important because international prices for some types of commodities (e.g., petroleum) are generally far more volatile than others (e.g., iron ore); and • Instability risk: a country’s degree of political instability and risk of violence or terrorism, estimated by World Bank economists based on an array of commercially and publicly available quantitative and qualitative indicators. The three indicators of Resilience are: • Current account surplus: current account surplus as a percentage of total economic output. A short-term measure of the resilience of a country’s international balance of payments in the face of economic shocks; • Budget surplus: government budget surplus as a percentage of total economic output. A large budget surplus can create a buffer against sudden economic volatility, by enabling the government to stimulate economic growth by increasing spending; and • Policy responsiveness: quality of a country’s economic and market regulations, estimated by World Bank economists based on an array of commercially and publicly available quantitative and qualitative indicators. In the full rating list that follows, each of these six indicators is rescaled onto a five-point statistical scale, corresponding to the Risk Map ratings “low” to “high”.
Credit Crunch Risk Index
Page 4
An Overall Commodity Crunch Index score and ranking is calculated for each country or territory based on the unweighted average of normalized scores on each of these six indicators. Although the Index score is calculated as an unweighted average, the final score is then adjusted so that no country’s overall Index score can be worse than that country’s score for the “Reliance on Commodity Exports” indicator. That is to say, to be at immediate risk from a global commodity crunch, a country’s economy must in the first instance be reliant on commodity exports. Some might argue that the impacts of the commodity crunch will spread farther than this. For instance, countries that receive a great deal of investment from oil-exporting countries will feel second-order effects of the commodity crunch. As oil-exporting countries suffer economic volatility, so will countries with strong economic links to the oil exporters. As a result, the impacts of the commodity crunch on the global economy in 2009 may well prove to be even broader than our Index suggests. On the following pages, we present the results of our calculations: the 2009 Commodity Crunch Index top 20, as well as the full Index results.
Credit Crunch Risk Index
Page 5
The 20 Countries Most at Risk The 20 countries our analysis suggests are at greatest risk from global commodity price volatility in 2009 are shown below.
Zimbabwe
1
Congo
2
Tajikistan
3
Papua New Guinea
4
Guyana
5
Suriname
6
Iraq
7
Guinea
8
Yemen
9
Côte d’Ivoire
10
Chad
11
Mozambique
12
Kazakhstan
13
Nigeria
14
Namibia
15
Venezuela
16
Congo DRC
17
Malawi
18
Zambia
19
Mali
20
Low Risk Medium Low Risk Medium Risk Medium High Risk High Risk Very High Risk
Credit Crunch Risk Index
Page 3
Policy Responsiveness
Budget Surplus
Current Account Surplus
RESILIENCE
Instability Risk
Volatility of Export Prices
EXPOSURE Reliance on commodity exports
Overall Risk
Overall Rank
INDEX
Full Commodity Crunch Index Results
The results for all countries included in the 2009 Index are shown below in alphabetical order.
Albania Angola Argentina Armenia Aruba Australia Austria Azerbaijan Bahamas Bahrain Bangladesh Barbados Belarus Belgium Belize Benin Bolivia Botswana Low Risk Medium Low Risk Medium Risk Medium High Risk
Brazil Bulgaria Burundi
High Risk
Cambodia
Very High Risk
Canada
Credit Crunch Risk Index
129 23 49 60 153
n/a
73 126 22 134 30 140 138
n/a
29 64 52
n/a
105 34 40 91 39 62 101 89
Page 4
Policy Responsiveness
Budget Surplus
Current Account Surplus
RESILIENCE
Instability Risk
Volatility of Export Prices
EXPOSURE Reliance on commodity exports
Overall Risk
Overall Rank
INDEX
Cape Verde Chad Chile China Colombia Congo Congo DRC Costa Rica Côte d’Ivoire Cyprus Czech Republic Denmark Djibouti Dominica Dominican Republic Ecuador Egypt El Salvador Eritrea Estonia Ethiopia Fiji Finland France Gabon Gambia
Credit Crunch Risk Index
100
n/a
11 55 116 58 2 17
n/a
98 10 120 107 131 146
n/a
135
n/a
139 24 80 117 145
n/a
66 90 50 136 108 35 133
n/a
Page 5
n/a
Policy Responsiveness
Budget Surplus
Current Account Surplus
RESILIENCE
Instability Risk
Volatility of Export Prices
EXPOSURE Reliance on commodity exports
Overall Risk
Overall Rank
INDEX
Ghana Greece Grenada Guatemala Guinea Guyana Haiti Honduras Hungary Iceland India Indonesia Iran Iraq Ireland Italy Jamaica Japan Jordan Kazakhstan Kenya Kuwait Kyrgyzstan Latvia
Credit Crunch Risk Index
n/a
n/a
83 127 25 121 122 92 8 5 141
n/a
53 109 76 97 45 33 7
n/a
148 115 41 147
n/a
67 13 75 142 38 79
Page 6
Policy Responsiveness
Instability Risk
Volatility of Export Prices
Reliance on commodity exports
RESILIENCE
Budget Surplus
Germany
EXPOSURE Current Account Surplus
Georgia
Overall Risk
Overall Rank
INDEX
Lebanon Lesotho Libya Lithuania Luxembourg Madagascar Malawi Malaysia Maldives Mali Malta Mauritius Mexico Moldova Mongolia Morocco Mozambique Namibia Nepal Netherlands New Zealand Nicaragua Niger Nigeria Norway Oman
Credit Crunch Risk Index
124 93 54
n/a
63 144 78 18 51 68 20
n/a
152 99 85
n/a
44 21 95 12 15 123 94 87 59 77
n/a
14 149 26
Page 7
n/a
Policy Responsiveness
Budget Surplus
Current Account Surplus
RESILIENCE
Instability Risk
Volatility of Export Prices
EXPOSURE Reliance on commodity exports
Overall Risk
Overall Rank
INDEX
Pakistan Panama Papua New Guinea Paraguay Peru Philippines Poland Portugal Republic of Korea Romania Russian Federation Rwanda Saint Lucia Saint Vincent and the Grenadines Samoa Saudi Arabia Senegal Seychelles Sierra Leone Singapore Slovakia Slovenia Solomon Islands South Africa Spain Sri Lanka
Credit Crunch Risk Index
132 106 4 42 36 103 96 114 102 88 46 104
n/a
119
n/a
n/a
118
n/a
n/a
143
n/a
43 69 27 71 151 82 112 61
n/a
57 111 86
Page 8
Policy Responsiveness
Budget Surplus
Current Account Surplus
RESILIENCE
Instability Risk
Volatility of Export Prices
EXPOSURE Reliance on commodity exports
Overall Risk
Overall Rank
INDEX
Sudan Suriname Swaziland Sweden Switzerland Syrian Arab Republic Tajikistan Tanzania Thailand Togo Tonga Trinidad and Tobago Tunisia Turkey Uganda Ukraine United Kingdom United States Uruguay Uzbekistan Vanuatu Venezuela (Bolivarian Republic of) Viet Nam Yemen Zambia Zimbabwe
Credit Crunch Risk Index
48 6 70 128 150 32 3 65
n/a
47 74 110
n/a
37 81 125 84 28 113 137 72 56 130
n/a
16 31
n/a
9 19 1
Page 12
Policy Responsiveness
Budget Surplus
Current Account Surplus
RESILIENCE
Instability Risk
Volatility of Export Prices
EXPOSURE Reliance on commodity exports
Overall Risk
Overall Rank
INDEX
© Copyright Aon Group, Inc. 2009. All rights reserved. No part of this publication mat be reproduced, stored in aretrieval system, or transmitted in any way or by any means,including photocopying or recording, without the writtenpermission of the copyright holder, application for whichshould be addressed to the copyright holder. Published by Aon Global Corporate Marketing and Communications Aon Limited is authorised and regulated by the Financial Services Authority is respect of insurance mediation activities only. If you would like further information about Political Risk Management please speak to your local Aon broker or email [email protected] FP ref: 5369
Copyright 2009 – Aon Corporation
Table of Contents On The Map. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Track Record. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 About This Year’s Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 The 20 Countries Most at Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Full Commodity Crunch Index Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Credit Crunch Risk Index
On The Map The 2009 Global Commodity Crunch Risk Index assesses the risk that emerging markets will suffer political or economic instability as a result of volatility in international commodity prices. The 2009 Political Risk Map displays one part of this Index: the exposure section, which is based on three indicators of risk. These three indicators are: (1) the degree to which the country’s economy is reliant on commodity exports; (2) the historical volatility of prices of this particular country’s exports; and (3) the country’s general risk of experiencing political instability or political violence. When global commodity prices fluctuate, these three factors, taken together, can create a dangerous cocktail. A high degree of economic volatility can feed rising political instability. When these issues combine, as they did during the commodity price boom and bust cycle of the 1970s and early 1980s, the repercussions for exposed countries can be severe. More details of the Index and its construction are provided in Section 3: About the Index.
Credit Crunch Risk Index
Page 1
Track Record For last year’s Political Risk Map, launched in January 2009, we produced a Credit Crunch Risk Index using a combination of quantitative indicators of exposure and resilience. Can such a quantitative approach be effective in predicting international political or economic instability? Obviously, there are limits to the analysis. Issues such as the ability of a particular leader to rise to the challenges posed by a crisis, or the possibility of an international bailout, are not factored into this analysis. However, these quantitative indicators can provide a useful assessment of the general ‘risk category’ into which a country falls. Most of the 15 riskiest countries in last year’s Credit Crunch Index have subsequently suffered downgrades of their sovereign credit risk ratings by one or more rating agencies or been put on negative watch (see the following page). This year, if global commodity prices continue to fall, as some analysts have forecast, we would expect our Commodity Crunch Index to have a similar value in assessing political and economic risks.
Last Year’s 15 Countries Most at Risk and Subsequent Rating Agency Actions 2008 Index Rank
Country
Rating Agency Actions
1
Latvia
Moody’s Downgrade 7 Nov 2008; S&P Downgrade 10 Nov 2008
2
Turkey
S&P Negative Outlook 13 Nov 2008
3
Hungary
Moody’s Downgrade 7 Nov 2008; S&P Downgrade 17 Nov 2008
4
Croatia
S&P Negative Outlook 27 Oct 2008
5
Lebanon
6
Lithuania
Moody’s Negative Outlook 7 Nov 2008; Fitch Downgrade 22 Dec 2008
7
Romania
S&P Downgrade 27 Oct 2008; Fitch Downgrade 9 Nov 2008
8
Estonia
Moody’s Negative Outlook 7 Nov 2008
9
Ghana
10
Slovenia
11
Costa Rica
12
Jordan
13
Bulgaria
Moody’s Negative Outlook 26 Sep 2008, Fitch Downgrade 10 Nov 2008
14
Jamaica
Fitch Downgrade 18 Nov 2008
15
Slovakia
Note that the above list of rating actions is not intended to be comprehensive.
Credit Crunch Risk Index
Page 2
About this Year’s Index The 2009 Global Commodity Crunch Risk Index is based on six indicators of exposure and resilience. The first three indicators assess Exposure: aspects of a country’s political or economic structure that increase exposure to volatility in global commodity prices. The second three indicators assess Resilience: aspects of a country’s economic policy or situation that may help a country to endure unexpected shocks. The three indicators of Exposure are: • Reliance on commodity exports: commodity exports as a percentage of a country’s total economic output. A measure of general economic dependence on commodity exports; • Volatility of export prices: historical price volatility of a country’s exports. This measure is important because international prices for some types of commodities (e.g., petroleum) are generally far more volatile than others (e.g., iron ore); and • Instability risk: a country’s degree of political instability and risk of violence or terrorism, estimated by World Bank economists based on an array of commercially and publicly available quantitative and qualitative indicators. The three indicators of Resilience are: • Current account surplus: current account surplus as a percentage of total economic output. A short-term measure of the resilience of a country’s international balance of payments in the face of economic shocks; • Budget surplus: government budget surplus as a percentage of total economic output. A large budget surplus can create a buffer against sudden economic volatility, by enabling the government to stimulate economic growth by increasing spending; and • Policy responsiveness: quality of a country’s economic and market regulations, estimated by World Bank economists based on an array of commercially and publicly available quantitative and qualitative indicators. In the full rating list that follows, each of these six indicators is rescaled onto a five-point statistical scale, corresponding to the Risk Map ratings “low” to “high”.
Credit Crunch Risk Index
Page 4
An Overall Commodity Crunch Index score and ranking is calculated for each country or territory based on the unweighted average of normalized scores on each of these six indicators. Although the Index score is calculated as an unweighted average, the final score is then adjusted so that no country’s overall Index score can be worse than that country’s score for the “Reliance on Commodity Exports” indicator. That is to say, to be at immediate risk from a global commodity crunch, a country’s economy must in the first instance be reliant on commodity exports. Some might argue that the impacts of the commodity crunch will spread farther than this. For instance, countries that receive a great deal of investment from oil-exporting countries will feel second-order effects of the commodity crunch. As oil-exporting countries suffer economic volatility, so will countries with strong economic links to the oil exporters. As a result, the impacts of the commodity crunch on the global economy in 2009 may well prove to be even broader than our Index suggests. On the following pages, we present the results of our calculations: the 2009 Commodity Crunch Index top 20, as well as the full Index results.
Credit Crunch Risk Index
Page 5
The 20 Countries Most at Risk The 20 countries our analysis suggests are at greatest risk from global commodity price volatility in 2009 are shown below.
Zimbabwe
1
Congo
2
Tajikistan
3
Papua New Guinea
4
Guyana
5
Suriname
6
Iraq
7
Guinea
8
Yemen
9
Côte d’Ivoire
10
Chad
11
Mozambique
12
Kazakhstan
13
Nigeria
14
Namibia
15
Venezuela
16
Congo DRC
17
Malawi
18
Zambia
19
Mali
20
Low Risk Medium Low Risk Medium Risk Medium High Risk High Risk Very High Risk
Credit Crunch Risk Index
Page 3
Policy Responsiveness
Budget Surplus
Current Account Surplus
RESILIENCE
Instability Risk
Volatility of Export Prices
EXPOSURE Reliance on commodity exports
Overall Risk
Overall Rank
INDEX
Full Commodity Crunch Index Results
The results for all countries included in the 2009 Index are shown below in alphabetical order.
Albania Angola Argentina Armenia Aruba Australia Austria Azerbaijan Bahamas Bahrain Bangladesh Barbados Belarus Belgium Belize Benin Bolivia Botswana Low Risk Medium Low Risk Medium Risk Medium High Risk
Brazil Bulgaria Burundi
High Risk
Cambodia
Very High Risk
Canada
Credit Crunch Risk Index
129 23 49 60 153
n/a
73 126 22 134 30 140 138
n/a
29 64 52
n/a
105 34 40 91 39 62 101 89
Page 4
Policy Responsiveness
Budget Surplus
Current Account Surplus
RESILIENCE
Instability Risk
Volatility of Export Prices
EXPOSURE Reliance on commodity exports
Overall Risk
Overall Rank
INDEX
Cape Verde Chad Chile China Colombia Congo Congo DRC Costa Rica Côte d’Ivoire Cyprus Czech Republic Denmark Djibouti Dominica Dominican Republic Ecuador Egypt El Salvador Eritrea Estonia Ethiopia Fiji Finland France Gabon Gambia
Credit Crunch Risk Index
100
n/a
11 55 116 58 2 17
n/a
98 10 120 107 131 146
n/a
135
n/a
139 24 80 117 145
n/a
66 90 50 136 108 35 133
n/a
Page 5
n/a
Policy Responsiveness
Budget Surplus
Current Account Surplus
RESILIENCE
Instability Risk
Volatility of Export Prices
EXPOSURE Reliance on commodity exports
Overall Risk
Overall Rank
INDEX
Ghana Greece Grenada Guatemala Guinea Guyana Haiti Honduras Hungary Iceland India Indonesia Iran Iraq Ireland Italy Jamaica Japan Jordan Kazakhstan Kenya Kuwait Kyrgyzstan Latvia
Credit Crunch Risk Index
n/a
n/a
83 127 25 121 122 92 8 5 141
n/a
53 109 76 97 45 33 7
n/a
148 115 41 147
n/a
67 13 75 142 38 79
Page 6
Policy Responsiveness
Instability Risk
Volatility of Export Prices
Reliance on commodity exports
RESILIENCE
Budget Surplus
Germany
EXPOSURE Current Account Surplus
Georgia
Overall Risk
Overall Rank
INDEX
Lebanon Lesotho Libya Lithuania Luxembourg Madagascar Malawi Malaysia Maldives Mali Malta Mauritius Mexico Moldova Mongolia Morocco Mozambique Namibia Nepal Netherlands New Zealand Nicaragua Niger Nigeria Norway Oman
Credit Crunch Risk Index
124 93 54
n/a
63 144 78 18 51 68 20
n/a
152 99 85
n/a
44 21 95 12 15 123 94 87 59 77
n/a
14 149 26
Page 7
n/a
Policy Responsiveness
Budget Surplus
Current Account Surplus
RESILIENCE
Instability Risk
Volatility of Export Prices
EXPOSURE Reliance on commodity exports
Overall Risk
Overall Rank
INDEX
Pakistan Panama Papua New Guinea Paraguay Peru Philippines Poland Portugal Republic of Korea Romania Russian Federation Rwanda Saint Lucia Saint Vincent and the Grenadines Samoa Saudi Arabia Senegal Seychelles Sierra Leone Singapore Slovakia Slovenia Solomon Islands South Africa Spain Sri Lanka
Credit Crunch Risk Index
132 106 4 42 36 103 96 114 102 88 46 104
n/a
119
n/a
n/a
118
n/a
n/a
143
n/a
43 69 27 71 151 82 112 61
n/a
57 111 86
Page 8
Policy Responsiveness
Budget Surplus
Current Account Surplus
RESILIENCE
Instability Risk
Volatility of Export Prices
EXPOSURE Reliance on commodity exports
Overall Risk
Overall Rank
INDEX
Sudan Suriname Swaziland Sweden Switzerland Syrian Arab Republic Tajikistan Tanzania Thailand Togo Tonga Trinidad and Tobago Tunisia Turkey Uganda Ukraine United Kingdom United States Uruguay Uzbekistan Vanuatu Venezuela (Bolivarian Republic of) Viet Nam Yemen Zambia Zimbabwe
Credit Crunch Risk Index
48 6 70 128 150 32 3 65
n/a
47 74 110
n/a
37 81 125 84 28 113 137 72 56 130
n/a
16 31
n/a
9 19 1
Page 12
Policy Responsiveness
Budget Surplus
Current Account Surplus
RESILIENCE
Instability Risk
Volatility of Export Prices
EXPOSURE Reliance on commodity exports
Overall Risk
Overall Rank
INDEX
© Copyright Aon Group, Inc. 2009. All rights reserved. No part of this publication mat be reproduced, stored in aretrieval system, or transmitted in any way or by any means,including photocopying or recording, without the writtenpermission of the copyright holder, application for whichshould be addressed to the copyright holder. Published by Aon Global Corporate Marketing and Communications Aon Limited is authorised and regulated by the Financial Services Authority is respect of insurance mediation activities only. If you would like further information about Political Risk Management please speak to your local Aon broker or email [email protected] FP ref: 5369
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