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This quarter several countries experienced an improvement in their overall country risk rating, reversing the recent trend that has seen more deterioration than improvement over the last several quarters:

Haiti improved from very high to high due to a slight decrease in political violence risk.

Ethiopia saw its overall country risk rating improve from high to medium high, driven by improvements to political violence risk, sovereign non-payment risk and banking sector vulnerability.

Iran’s country risk rating dropped from very high to high as the prospects of relief in sanctions drove improvements following the signing of the Joint Comprehensive Plan of Action agreement on Iran’s nuclear programme.

Finally, China improved from a medium high to medium country risk rating thanks to a decrease in political violence risk as well as a reduction in supply chain disruption risk.

Meanwhile, only one country – Suriname – saw a deterioration in its overall country risk rating, moving from medium to medium high due to an increase in supply chain disruption risk.

There were a number of countries that experienced a change in some of their individual risk icons this quarter, but changes were not sufficient to trigger an overall rating change. These are nevertheless worth monitoring as potential precursors to future changes.

Countries that saw an improvement in three or more individual risk icons include Albania, Macau and Turkmenistan (although the latter also saw a deterioration in one risk - political violence). On the other hand, Belize saw a deterioration in supply chain risk, political interference risk and the ability of the government to stimulate the economy, although these were partially balanced by an improvement in exchange transfer risk.

Aon Risk Solutions | Political Risk

Q4 2015

Summary

Political Risk Quarterly NewsletterComplementing the annual Political Risk Map, Aon’s political risk newsletter is developed in partnership with Roubini Global Economics, an independent, global research firm founded in 2004 by renowned economist Nouriel Roubini. The newsletter is released on a quarterly basis and provides insight into levels and types of Political Risk in non-EU and -OECD countries.

In this Issue2 Regional overview of political risks

3 In the spotlight this quarter - Asian anti- corruption campaigns and political risk

3 Country Risk Rating Overviews

4 Key Contacts

Political Risk Newsletter | Aon Risk Solutions | Q4 2015 2

Regional overview of political risksAsia Political risk ratings in Asia have been relatively stable apart from the improvements in China. However, weaker growth and greater government interference in driving investment in Malaysia, Indonesia and Thailand raises future risks (these are accounted for in the country risk ratings). Similarly in India, the fiscal and economic reforms seem to have stalled due to vested interests in the agricultural sector, which will weigh on social cohesion. Lower oil prices are generally positive for this region, as is the Chinese stimulus. We are monitoring the possibility of greater sovereign non-payment risk in Indonesia due to delayed payments to national governments.

Eastern Europe and CIS Political risk has stabilised in many of the CIS and Caucasus countries such as Moldova as the conflict in Ukraine has subdued, and economic and social conditions in Russia have remained stable as the country focuses on its defence policy. Russia continues to be a country with significant hurdles for foreign investors. It is reducing reliance on imports and foreign capital. Russia’s recession is weighing heavily on the income of CIS countries like Turkmenistan, Kazakhstan, Uzbekistan and Kyrgyzstan, where remittances have weakened. The fall in oil prices have reinforced this stress on the balance sheets of Turkmenistan and Kazakhstan, which is now manifesting in greater pressure on several economic and political institutions such as central banks. Public criticism of policy makers undermining the independence of these institutions are adding to the exchange transfer risk, as well as exacerbating the uncertainty around the regulatory environment for foreign investors. Rising inflation is adding to the political risk outlook, which is manageable in Russia but of greater concern in neighbouring countries. Although Ukraine’s government has passed several reforms that reduce the risk of doing business, there is a growing nationalist shift, which raises questions about implementation. The restructuring of sovereign debt looks set to go ahead despite legal challenges from Russia. Private sector external debt restructuring is likely to follow, suggesting ongoing legal issues for creditors.

Latin America and Caribbean Political risk in Brazil continues to increase towards a possible impeachment case and collateral damage from the ‘Lava Jato’ corruption scandal, which are adding to the uncertainty for foreign and local investors. As the economy sinks, the fiscal implications mean local businesses face increased uncertainty. The legal process has actually resulted in an improvement in the quality and predictability of the judicial system, which bodes well for implementation in the future, but in the near-term risks are high as the political gridlock persists. Recent elections in Argentina and Venezuela signal a desire for change in these countries that could set in motion various economic and social reforms. Argentina’s political risk rating may well drop in 2016 if some of the promised social policy and structural measures are implemented. A paucity of FX reserves suggests exchange transfer risk

remains high in the short-term and it remains unclear how effective the government will be at implementing these reforms. In Venezuela, political violence remains high (and increased during the legislative election campaign), along with all other elements of political risk. We expect implementation risks to remain very high given the uncertainty of legal, regulatory and exchange rate changes. Should the government not fully recognize the results, protests are possible. Elsewhere in the region, risks have been stable.

Middle East and North Africa The MENA region continues to have some of the highest-risk countries in the world, with few changes in overall country risk rating. Weaker oil prices and continued regional conflicts have challenged the resilience of key economies and political systems and we think the trend is towards heightened political risk, particularly as the Syrian conflict becomes more global. The involvement of global and regional parties in the conflict against ISIS raises risks of accidents and retaliatory measures such as the recent sanctions pressure between Turkey and Russia. The ongoing conflicts in Syria, Iraq, Yemen and elsewhere will intensify the focus on military and security spending despite lower government revenues. The weakness in the oil price suggests a further weakness in economic risk ratings across regional producers including those in the Gulf Cooperation Council (GCC), while some regulatory costs are likely to rise as new taxes on corporations are implemented. We expect greater pressure to employ nationals in Saudi Arabia and Oman and note that both are experiencing weakness across several country risk ratings. In general, GCC countries have more savings to deploy to avoid economic shocks, but the cost of financing will rise, as will government interference in the economy and banking system. Energy importing peers generally have stable, although high, country risk ratings, but will suffer from a general tightening of regional financial conditions. Egypt stands out as vulnerable.

Sub-Saharan Africa As in the MENA region, weaker commodity prices are putting strain on these economies and generally reinforcing the high levels of country risk. Oil and metal producers like Nigeria, Mozambique, Uganda, Zambia and Ghana have seen a deterioration in some country risk factors, including legal and regulatory risk as well as exchange transfer risks. Mozambique, Uganda and Angola have all increased government arrears to the private sector and there remains the risk of non/delayed payment particularly in the energy sector. Oil and gas producers, Uganda and Tanzania risk further delays in developing their resources in the face of a declining global energy sector. By contrast, oil importing nations in East Africa have experienced a modest reduction in risk, notably Ethiopia and Kenya, where some recent regulatory reforms and a reduction in political violence have improved the outlook politically and economically. We assume this trend will continue.

Political Risk Newsletter | Aon Risk Solutions | Q4 2015 3

In the spotlight this quarterAsian anti-corruption campaigns and political risk

2015 has marked a period of important anti-corruption campaigns across Asia and many emerging market regions. Xi Jinping’s government in China carried out a significant crackdown on corruption as part of his attempt to consolidate political control. Moreover, the Jokowi and Modi administrations in Indonesia and India respectively came to power on the back of promises to reduce corruption. In Malaysia, President Najib’s corruption scandal has weakened investment prospects and reduced the country’s resilience to lower energy prices.

In China, there are signs that the anti-graft campaign has now stabilised and entered into a new phase focused more on the financial sector (previously the focus was on major regional politicians and state-owned enterprises—SOEs; which contributed to a marked slowdown in conspicuous consumption). After mid-2015, the pace and size of corruption investigations slowed and this stabilisation of the regulatory environment may have been one of the drivers of the reduction in legal and regulatory risk in our country risk rating.

Since the summer market sell-off, the Chinese authorities have shifted to probing financial company managers versus investigating bureaucrats (their first target) and officials at SOEs (second). This may suggest that the leadership is satisfied that it has consolidated its political power, implying that they may now have a better chance of implementing reforms and other policies. It also suggests less uncertainty for foreign investors around implementation. Economic policy makers are thus more focused on short-term stimulus and meeting the goal of medium-term growth and consumption target.

China’s anti-corruption campaign has shifted towards SOEs and the financial sector

Country Risk Rating OverviewsImprovements to country risk rating: Haiti (high) saw a slight decrease in political violence risk. Ethiopia (medium high) saw improvements to political violence risk, sovereign non-payment risk and banking sector vulnerability. Iran (high) improved on the prospect of relief of sanctions following the signing of the Joint Comprehensive Plan of Action agreement on Iran’s nuclear programme. China (medium) improved thanks to a decrease in political violence risk and a reduction in supply chain disruption risk.

Deteriorations in country risk rating: Suriname (medium high) deteriorated due to an increase in supply chain disruption risks.

Risk. Reinsurance. Human Resources.

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About Roubini Global Economics Roubini Global Economics (RGE) was founded in 2004 by Professor Nouriel Roubini. Through his national balance

sheet approach to analysing economies, Nouriel Roubini foresaw the coming US housing crisis and was eager to

bring the same approach to analyse the rest of the world. Now numbering nearly 100 staff around the world,

RGE’s mission is to produce macro analysis beyond the consensus view to influence investment decisions around

the world. RGE works with clients in a series of different ways, from macro strategy subscription product, to bespoke

work, multi-client conference calls, direct access to analysts, and the licensing of its systematic country risk analysis

tool. For further information on Roubini Global Economics, please visit www.roubini.com.

Matthew Shires Aon Crisis Management Head of Political Risk matthew.shires@aon.co.uk

Prateek Singh Head of Political Risk Analytics prateek.k.singh@aon.co.uk

Gareth Hollins Roubini Global Economics Research Consultant gareth.hollins@roubini.com

Key Contacts