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Investors failing to measure global political risk, report says

GLOBAL - Investors are failing to fully assess political risk in many countries stemming from geopolitical events or rising “resources nationalism”, according to a new report.

The Political Risk Atlas 2012, published by consultancy Maplecroft, also found that investors were increasingly exposed to instability in the Arab Spring countries, potential societal unrest and possible regime changes worldwide.

The report found that the elevated risk of political violence - particularly heightened terrorist activity and sabotage in Algeria, Egypt, Libya and Morocco - was causing a “serious threat” to oil and gas companies in the MENA region.

These risks were vividly illustrated during the Libyan revolution when oil workers had to be evacuated, the report added, while the conflict in Syria has led to a loss of revenue for oil companies, and international sanctions have forced investors to withdraw.

Jim O’Neill, chairman at Goldman Sachs Asset Management and a Maplecroft investor, said: “In a time of unprecedented geopolitical turmoil, political risk analysis has become essential for investors.

“It appears, however, that the BRIC economies might have turned the corner in that regard.”

According to the report, the majority of growth economies have seen a reduction in political risk, with dynamic and structural risk falling for the BRIC countries, Indonesia, Mexico and the Philippines.

The report said: “Counting as one of the key variables, strong growth and investment potential in these countries helps provide the conditions for greater human security and improved living standards and socio-economic development.”

However, companies still face considerable risks, even in these growth economies, Maplecroft said.

Seven of the ‘Next 11’ states - which represent those countries with the most promising economic outlook, according to Goldman Sachs - remain in the ‘high-risk’ category in both the dynamic and structural risk indices for 2012.

“Responsible businesses must act to mitigate these risks whilst seizing the opportunities presented by these high-growth countries,” the report said.

“How these governments address reform of both labour legislation and domestic spending policy will be important.”

The Atlas also found that the risk of “resource nationalism” for extractive companies was on the rise in countries such as Congo, Guinea, Zimbabwe, Turkmenistan and Venezuela.

It also pointed out that the price of many commodities - such as minerals and metals in particular - had increased to record levels over the past year, heightening the incentive for resource-rich nations to take a greater share of profits from companies developing their natural reserves.

Skinner said: “Oil, gas and mining companies should be aware of the political and regulatory challenges they may face when investing in territories with a high risk of ‘resource nationalism’.

“They could lose control or possession of assets, as well as individual property, or face higher taxes. This is likely to result in heavy financial costs affecting the economic viability of reserves.”

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