Elections in all the “fragile five” emerging economies next year, along with the thorny topics of Syria and Iran, will make life tricky for investors trying to steer through political risks in developing markets after a hairy year.
The withdrawal of US monetary stimulus will set the backdrop for the year, particularly for these big developing economies that depend heavily on foreign investor inflows.
Investors in companies or banks or other institutions agreeing contracts in emerging markets can buy insurance policies covering them against specific risks such as political violence, expropriation or contract renegotiations by governments or local private companies. Institutional investors may also use credit default swaps to hedge against the possibility of a government not paying its debts.
The size of the political risk insurance market jumped 33 percent to record highs of $100 billion (about R1 trillion) last year, according to data released earlier this month by the World Bank’s political risk arm, which said it expected similar growth this year.
Investors fretted about unrest in the Middle East and north Africa, expropriation risk in Latin America and general capital constraints, the report from the World Bank’s Multilateral Investment Guarantee Agency said.
The US Federal Reserve’s decision this week to reduce the money-printing that has fuelled demand for risky assets is expected to drag on growth in emerging markets next year, with Brazil, India, Indonesia, South Africa and Turkey seen as especially vulnerable to a sudden outflow of foreign cash.
But with elections due in all of the “fragile five” next year, politicians are likely to spend money to try to keep voters sweet rather than taking a more cautious approach.
“These are all the countries where markets have wanted to see small twin deficits – elections make that hard to achieve, at least on the budget side,” Charles Robertson, the chief economist at Renaissance Capital, said. “There is lots of potential for markets to be jittery over these countries in 2014.”
Emerging markets have already suffered from expectations of a tapering of the Fed’s bond-buying programme, which has been on the cards for more than six months. Stocks are in the red for the year, heavily underperforming developed markets. But with the reduction in US stimulus likely to be a theme for the whole of next year, politicians will be wary of voter reaction over jobs or services.
The greater wealth that recent rapid growth has brought has pushed popular demands beyond basic human needs, political risk analysts say, a thread that runs from the Arab Spring uprisings of 2011 through to this month’s protests in Kiev.
“The frustration that spilled onto the streets was driven by middle-class people beginning to assert themselves politically,” said Christopher Torrens, the director of global risk analysis at Control Risks, which sees next year as “particularly challenging”. – Reuters