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AMB Country Risk Report August 24, 2016 Our Insight, Your Advantage. Country Risk Tier CRT-5 Argentina • The Country Risk Tier (CRT) reflects A.M. Best’s assessment of three categories of risk: Economic, Political and Financial System Risk. • Argentina, a CRT-5 country, has moderate levels of economic risk, high levels of political risk and very high financial system risk. Very High Very High Very High High High High Moderate Moderate Moderate Low Low Low • Argentina will face several challenges in the near term including a continued weak economic environment and legacy debt issues that will limit its growth potential. Gross domestic product (GDP) growth is forecasted to contract by -1.0% with inflation at 38% for 2016. Growth for 2016 - 2019, however, is expected to pick up to a range of 2-3% during the period. • Regional growth will rely, in part, upon US, European and Chinese growth rates as well as domestic demand growth and improved economic policies. As various factors will affect each country differently, the recovery process will not be homogenous within the group. Mexico Bahamas Dominican Republic Cuba Puerto Rico Haiti Cayman Islands Belize Jamaica British Virgin Anguilla Islands St. Maarten St Kitts & Nevis Honduras Very Low Very Low Very Low Guatemala El Salvador St Vincent & the Grenadines Curacao Grenada Costa Rica Panama Political Risk Financial System Risk Cape Verde St Lucia Barbados Trinidad & Tobago Venezuela Guyana Colombia Economic Risk Antigua & Barbuda Dominica Nicaragua Suriname French Guiana Ecuador Peru Brazil Bolivia Country Risk Tier 5 (CRT-5) Very High Level of Country Risk Country Risk Tier 4 (CRT-4) High Level of Country Risk Chile Paraguay Argentina Uruguay Country Risk Tier 3 (CRT-3) Moderate Level of Country Risk Country Risk Tier 2 (CRT-2) Low Level of Country Risk Country Risk Tier 1 (CRT-1) Very Low Level of Country Risk Falkland Islands South Georgia Tierra Del Fuego Copyright © 2016 A.M. Best Company, Inc. and/or its affiliates. ALL RIGHTS RESERVED. No part of this report or document may be distributed in any electronic form or by any means, or stored in a database or retrieval system, without the prior written permission of A.M. Best. For additional details, refer to our Terms of Use available at A.M. Best website: www.ambest.com/terms. AMB Country Risk Report Argentina Regional Summary: Latin America Vital Statistics 2015 Nominal GDP Population GDP Per Capita Real GDP Growth Inflation Rate Literacy Rate Urbanization Dependency Ratio Life Expectancy Median Age USD bn mil USD % % % % % Years Years 585.62 43.1 13,589 1.2 98.1 91.8 56.5 77.7 31.4 Insurance Statistics Premiums Written (Life) Premiums Written (Non-Life) Premiums Growth (2014 - 2015) USD mil USD mil % 3,527 15,882 9.5 Regional Comparison • Consumer and business confidence remains subdued in the region due to slowing economic growth and political uncertainties. Most countries would benefit from improved transparency and a reduction in the level of corruption. Source: IMF, World Bank, Swiss Re, Axco and A.M. Best Economic Risk: Moderate Economic Growth • Argentina is rich in natural resources, has a large agricultural sector and benefits from a well-educated work force. It remains one of South America’s largest economies. 25 CPI Inflation 20 • Weak external demand will be a headwind for the economy. Brazil, which is suffering from its worst recession in decades, is Argentina’s main trading partner. Additionally lower commodity prices and general economic weakness in the region will continue to be challenging. 15 10 5 0 • The weak economic outlook for commodity exporters is exacerbating ongoing political tensions for some countries in the region including Brazil and Venezuela. • Several countries (i.e. Mexico and Peru) have been able to mitigate the economic downturn by implementing credible fiscal and monetary policies. External shocks to these economies have been somewhat reduced by implementing countercyclical policies. Country Risk Tier CRT-5 CRT-4 CRT-2 CRT-4 CRT-4 CRT-5 Argentina Brazil Chile Colombia Peru Venezuela % • Macroeconomic challenges affecting the region include a slowdown in external demand, exchange rate volatility, currency depreciation, inflation, income inequality, tightening financial conditions and the need to address structural problems in order to raise investment and jobs creation. Superintendency of Insurance Insurance Regulator Real GDP • Economic growth is expected to remain subdued over the medium term, particularly for countries that are commodity exporters and those countries that are experiencing weak investment. 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 • The government hopes to reduce high inflation. Its goal for 2016 is 30% and it hopes to reduce the rate to single digits by 2019. -5 Source: IMF World Economic Outlook and A.M. Best 2 AMB Country Risk Report Argentina Political Risk Summary Political Risk: High Score 1 (best) to 5 (worst) Argentina World Average • In December 2015, Mauricio Macri became the new president of Argentina. He succeeds former president Kirchner who had held the office since 2007, when she succeeded her husband who died in office. International Transactions Policy 5 4 Legal System Monetary Policy 3 • Marci hopes to improve Argentina’s business operating environment by addressing foreign exchange restrictions, high levels of inflation and import barriers. Additionally, he has pledged to restore the independence of the central bank and improve the validity of data from the national statistic office. 2 1 Regional Stability Fiscal Policy 0 Social Stability Business Environment Government Stability • In the past there has been heavy state intervention in the economy which has limited foreign direct investment into the country. Argentina currently ranks 121 out of a 189 countries in the World Bank’s Doing Business survey. Labor Flexibility Source: A.M. Best • Marci may have difficulties passing legislation as he does not control a majority of the seats in Congress. Many reforms will likely depend on Marci’s ability to form and maintain a coalition government. Financial System Risk: Very High • The Superintendency of Insurance is responsible for insurance supervision in Argentina. GDP Per Capita and Population for Selected Countries 250 16,000 GDP Per Capita Population 14,000 200 12,000 150 Millions USD 10,000 8,000 100 6,000 • The government is making progress in reporting factual economic data according to the IMF. In the past economic reporting was suspect as the methodology used to calculate statistics has attracted criticism from various authorities. • Argentina recently paid past due interest of USD 2.7 B on a bond that was in default since July of 2014. As a result, Argentina has regained access to international capital markets and the potential for improved external financing options. 4,000 50 2,000 0 Argentina Brazil Chile Colombia Peru Venezuela Source: IMF and A.M. Best 3 0 • Fiscal deficits have increased government debt over the years, with the current level of debt at approximately 50% of the country’s GDP. Currently over 60% of government debt is denominated in foreign currency. AMB Country Risk Report Argentina GUIDE TO BEST’S COUnTry rISk TIErS A.M. Best defines country risk as the risk that country-specific factors could adversely affect the claims-paying ability of an insurer. Country risk is evaluated and factored into all Best’s Credit Ratings. Countries are placed into one of five tiers, ranging from “CRT-1” (Country Risk Tier 1), denoting a stable environment with the least amount of risk, to “CRT-5” (Country Risk Tier 5) for countries that pose the most risk and, therefore, the greatest challenge to an insurer’s financial stability, strength and performance. A.M. Best’s Country Risk Tiers are not credit ratings and are not directly comparable to a sovereign debt rating, which evaluates the ability and willingness of a government to service its debt obligations. Country risk Tiers Country risk Tier Definition CRT-1 Predictable and transparent legal environment, legal system and business infrastructure; sophisticated financial system regulation with deep capital markets; mature insurance industry framework. CRT-2 Predictable and transparent legal environment, legal system and business infrastructure; sufficient financial system regulation; mature insurance industry framework. CRT-3 Developing legal environment, legal system and business environment with developing capital markets; developing insurance regulatory structure. CRT-4 Relatively unpredictable and nontransparent political, legal and business environment with underdeveloped capital markets; partially to fully inadequate regulatory structure. CRT-5 Unpredictable and opaque political, legal and business environment with limited or nonexistent capital markets; low human development and social instability; nascent insurance industry. Country risk reports A.M. Best Country Risk Reports are designed to provide a brief, high-level explanation of some of the key factors that determine a country’s Country Risk Tier assignment. It is not intended to summarize A.M. Best’s opinion on any particular insurance market or the prospects for that market. Categories of risk Country Risk Reports provide scores for three categories of risk for each country. These scores are (1) Very Low; (2) Low; (3) Moderate; (4) High and (5) Very High. Category of risk Definition Economic Risk The likelihood that fundamental weaknesses in a country’s economy will cause adverse developments for an insurer. A.M. Best’s assessment of economic risk evaluates the state of the domestic economy, government finances and international transactions, as well as prospects for growth and stability. Political Risk The likelihood that government or bureaucratic inefficiencies, societal tensions, inadequate legal system or international tensions will cause adverse developments for an insurer. Political risk comprises the stability of the government and society, the effectiveness of international diplomatic relationships, the reliability and integrity of the legal system and of the business infrastructure, the efficiency of the government bureaucracy, and the appropriateness and effectiveness of the government’s economic policies. Financial System Risk Financial system risk (which includes both insurance and non-insurance financial system risk) is the risk that financial volatility may erupt due to inadequate reporting standards, weak banking system or asset markets, and/or poor regulatory structure. In addition, it includes an evaluation of whether the insurance industry’s level of development and public awareness, transparent and effective regulation and reporting standards, and sophisticated regulatory body will contribute to a volatile financial system and compromise the ability of an insurer to pay claims. Political risk Summary To provide additional detail on the political risk in a given domicile the Country Risk Reports include the Political Risk Summary. The Political Risk Summary is a radar chart that displays scores for nine different aspects of political risk scored on a scale of one to five with one being the least amount of risk and five being the highest amount of risk. Category Definition International Transactions Policy Measures the effectiveness of the exchange rate regime and currency management. Monetary Policy Measures the ability of a country to effectively implement monetary policy. Fiscal Policy Measures the ability of a country to effectively implement fiscal policy. Business Environment Measures the overall quality of the business environment and ease of doing business. Labor Flexibility Measures the flexibility of the labor market, including the company’s ability to hire and fire employees. Government Stability Measures the degree of stability in a government. Social Stability Measures the degree of social stability, including human development and political rights. Regional Stability Measures the degree of stability in the region. Legal System Measures the transparency and level of corruption in the legal system. Country risk Tier Disclosure A Country Risk Tier (CRT) is not a credit rating, rather it represents a component of A.M. Best’s Credit Rating Methodology that is applied to all insurers. A CRT is not a recommendation to purchase, hold or terminate any security, insurance policy, contract or any other financial obligation issued by a government, an insurer or other rated issuer, nor does it address the suitability of any particular policy, contract or other financial obligation for a specific purpose or purchaser. Version 091714 Copyright © 2016 by A.M. Best Company, Inc. Copyright © 2016 A.M. Best Company, Inc. and/or its affiliates. ALL RIGHTS RESERVED. No part of this report or document may be distributed in any electronic form or by any means, or stored in a database or retrieval system, without the prior written permission of A.M. Best. For additional details, refer to our Terms of Use available at A.M. Best website: www.ambest.com/terms. 4