Thursday, March 15, 2007

Political risk in emerging markets

Excerpts from a Financial Times article on rising political risk in emerging markets:

Political risk in emerging markets has risen sharply amid rising expropriation risks, regulatory uncertainty and a worsening credit outlook, according to a report out on Tuesday.

The Alliant Emerging Markets political risk index climbed 5 per cent in the year to February, its biggest since the aftermath of the September 2001 terrorist attacks.

Underpinning the rise were increasing government action against foreign investors in Latin America and central Asia and credit risks in Eastern Europe.


The article goes on to detail the growing trend towards resource nationalization, state expropriation of assets, and contract and regulatory disputes with government. These factors make business all the more treacherous in "emerging" nations.

But given the fact that we've seen clear evidence of these trends unfolding over the past several years, should much of this come as a surprise?

In aiming to quantify risk for their clients, Alliant tries to gauge these concerns through their risk index. As the FT article points out:

Alliant’s political risk index rose to 76.1 from 72.5 last March. Early in 2001 it stood below 68.

What I would be interested to know is whether the risk index is a forward-looking indicator, or more of a (realistically speaking) backwards-looking indicator, like the VIX.

In other words, is the index rising or falling on the back of events that are currently taking place or have already occured, or will it be able to accurately forecast political risks ahead?