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This quarter, only one country—Serbia—experienced an improvement in its Country Risk Rating, moving to medium from medium-high.

No country experienced sufficient deterioration in the political risk situation to warrant a downgrade in its overall Country Risk Rating. This is a change from recent quarters, when risk rating downgrades have dominated.

Nonetheless, several countries have experienced a change in some of their individual risk scores, which can be a precursor for an overall change in a Country Risk Rating and should be monitored closely.

One of the countries that saw an improvement in individual risk icon scores was Nepal, which experienced an improvement in economic resilience and a decline in political violence risk. Weighing against these improvements is the government’s ongoing challenge in dealing with continuing earthquakes and aftershocks.

Countries with a deterioration in individual risk icon scores include:

• Saudi Arabia, Iraq and Angola, all of which experienced higher economic risks as lower oil prices weakened economic resilience.

• Brazil, where government intervention risk in key sectors has increased and recent political scandals have reinforced persistent corruption issues.

Two Asian countries – Thailand and China – experienced significant political or policy shocks respectively, suffering a terrorist attack and significant crisis of confidence on economic performance. We see these events as consistent with each country’s overall medium-high country risk rating. Thailand has a high political violence score which is already reflective of the divides within the country, although other areas of political risk are much lower.

In China’s case, we have long highlighted the extensive intervention of the government within the economy, and continued challenges around the business environment. The August 2015 market sell-off in China reflected uncertainty about the government’s policy stance and its ability to stabilize the economy and cope with shocks. The situation is still ongoing and the structural slowdown in China’s economy will pose considerable political and operational risk.

Aon Risk Solutions | Political Risk

Q3 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 - Iran’s Nuclear Agreement and Regional Political Risk

3 Country Risk Rating Overviews

4 Key Contacts

Political Risk Newsletter | Aon Risk Solutions | Q3 2015 2

Regional overview of political risksAsia Political risks have generally increased in Asia, with recurring corruption issues impairing Malaysia’s policy management, conflict and terrorism in Thailand hitting investment and the Indonesian government continuing to impose FX restrictions, while being wary of foreign investment. In China, also, continued protests and government intervention in the stock and currency markets has added volatility and uncertainty, while contributing to an elevation in public dissent. This economic, policy and rates uncertainty could weigh on economic and financing for some of China’s key trading partners in Asia, as well as commodity producers globally.

Eastern Europe and CIS The deep recession in Russia and loss of remittances has put pressure on its CIS and Central and Eastern European trade partners, a trend that has been amplified by oil export declines. The depreciation of the Russian ruble has hurt countries such as Kazakhstan, which is likely to require greater currency depreciation. And the Ukrainian conflict is again heating up in the far east of Ukraine, which suggests sanctions will remain in place for some time. Meanwhile, Ukrainian debt restructuring is set to continue, which is likely to set off a wave of corporate arrears. On the upside, the Ukrainian government is taking some steps to improve the business climate—which could, over time, make it a more reliable place for foreign investors.

Latin America and Caribbean The region remains generally stable, although a notable rise in political discontent and weak commodity prices threatens this. Latin America has experienced the most extensive deterioration of growth expectations across major emerging-market regions, which has added to political pressure. Popular support for governments is low across many of the region’s major economies, including Colombia, Chile and Mexico. Brazil’s President Dilma Rousseff, in particular, has plumbed new depths in terms of popularity ratings and, with

corruption scandals affecting many key politicians, policy making will be very difficult, and the chance of impeachment and/or early elections has risen. The Caribbean, meanwhile, has generally benefited from the lower oil prices as most countries are sizeable net importers. Domestic policies remain stable, although the region as a whole remains heavily indebted.

Middle East and North Africa Across the region, political risk has increased or remained high as internal and regional conflicts continue and extremist groups like ISIS, Boko Haram and AQIM remain meaningful threats to domestic stability and a drain on public finances. At the same time, lower oil prices have exacerbated economic and financial risks for oil producers. Some, like Algeria and Iraq, are finding it very difficult to cope and have maintained or increased exchange transfer restrictions. Others, such as the Gulf Cooperation Council states, have significant domestic resources to support their policies. Nonetheless policy space is declining, while Iran’s potential re-entry to global markets will exert further downward pressure on oil prices, while also increasing incentives for maintaining high defence spending..

Sub-Saharan Africa Weaker commodity prices, especially oil and gas, have put pressure on several regional producers, including Angola and Nigeria, which have experienced an increase in exchange transfer risk as they have sought to avoid currency depreciation. Political violence risk also remains high in these countries and, in Nigeria, we are closely watching the (slow) formation of the new government, which takes office in an environment without many policy levers. The recurrence of Ebola in Sierra Leone will keep pressure on its other institutions, while impairing infrastructure development.

Political Risk Newsletter | Aon Risk Solutions | Q3 2015 3

In the spotlight this quarterIran’s Nuclear Agreement and Regional Political Risk

The nuclear agreement between Iran, the EU and the five permanent members of the UN Security Council has the potential to meaningfully change Iranian and regional political risk. In this feature, we look at the way in which Iran’s own risk ratings might evolve and how these trends could affect the Middle East and other oil producers.

Assuming the agreement passes some key hurdles, nuclear-related sanctions will gradually be suspended in 2016, paving the way for more meaningful oil output volumes, investment in Iran and an increase in Iran’s policy space to stimulate the economy.

By contrast, weaker oil prices will maintain the economic pressure on neighbouring oil producers, who will need to contend with falling revenue while seeking to maintain, or even increase, defence spending to deal with the perceived threat of a newly invigorated Iran.

What is the possible impact on Iran’s Country Risk Rating?

We have maintained Iran’s very high Country Risk Rating given continued political and implementation uncertainties, it’s involvement in regional conflicts and the economic strains that come from low oil prices.

Iran’s high risks are not solely related to its nuclear program. Even before the 2010-11 round of sanctions, Iran was rated as high or very high risk due to the high levels of political violence, rampant and worsening government intervention in the economy under the Ahmadinejad regime and a very difficult business environment. Expropriation risk was meaningful and government entities were often in arrears to their private and quasi-public counterparties.

Economic and financial risks should ease slightly as the suspension of sanctions gradually unlocks Iran’s foreign assets and reduces import transaction costs. Although recent guidance from the U.S. and Iran suggests government reserves are smaller than the USD 150 billion estimate that was circulating a few months ago, the expected trade and investment linkages should nevertheless materialise.

We expect Iran to regain access to its foreign official holdings, either gradually or in lump sum. Iran has an estimated USD 100 billion-150 billion in foreign assets in accounts it can access only under

restrictions. If financial and insurance sanctions are also lifted, this would increase its ability to transmit payments, even if it doesn’t change its willingness to pay.

The Rouhani administration has been pushing forward with economic reforms. These policy changes could bring improvements in legal and regulatory risk, government interference and, of course, ease of doing business, but these will take time.

Iran’s Country Risk Rating will thus depend on the lifting or suspension of sanctions that removes the risk of legal judgement/confiscation and fines and allows Iranian entities to return to global banking markets. And Iranian policy choices surrounding support to business and economic reforms, as well as fiscal and monetary policy to make it easier for the local private sector to access finance and operate.

The Rouhani administration, which is more technocratic than past regimes, has already improved policy making and the policy trajectory, and it is possible the government will move forward with a range of structural and fiscal reforms, probably under IMF guidance.

Companies, particularly in Europe and Asia, are intrigued by the opportunities in Iran. Many are slowly assessing the operating environment and setting up exploratory groups to examine the regulatory burdens. Iran’s economic structure and over-indebted banks suggest it will be reliant on foreign investors to finance any new investment.

Whether companies sign deals in the oil or other sectors with Iran depends both on the sequencing of the suspension of sanctions, but also on the terms of any investment agreement. Given the excess supply in the global oil market, Iran may need to offer competitive terms to secure new investment deals.

Economic risks will likely ease from the period when sanctions were tightest, but Iran’s private sector may struggle to partner with global players, given issues around corruption and the lack of credit. Iranian banks have engaged in significant politically motivated lending that is only slowly being cleaned up, so they will struggle to support the private sector and provide funding.

Country Risk Rating OverviewsImprovement to country risk rating: Serbia’s moderately high levels of political risk are set to reduce gradually as the country progresses towards EU accession over the next half decade. While Serbia has high and rising public debt, its new IMF program, as well as funding from the UAE, could help stabilise macroeconomic policy. We have subsequently noted a reduction in exchange transfer and sovereign non-payment risks.Political violence risks are low, but legal and regulatory burdens remain high, and corruption and political interference is worse than in many of its recently acceded peers. Although a low risk, the conflict between Russia and the Ukraine could spill over to Serbia, which has historical ties to Russia. Indeed,

Russia and the Gulf states are major investors in Serbia, which could counter the incentives of possible EU membership.

Risk. Reinsurance. Human Resources.

© Aon plc 2015. All rights reserved.The information contained herein and the statements expressed are of a general nature and are not intended to address the circumstances of any particular

individual or entity. Although we endeavor to provide accurate and timely information and use sources we consider reliable, there can be no guarantee that such

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a thorough examination of the particular situation.

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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