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Increase of nationalism on natural resources may give rise to jeopardy for commodities

According to a new study, it is found that the countries that were rich in natural resources have now turned increasingly protectionist from the last year as coronavirus has threatened their economies. 

On Thursday, risk consultancy Verisk Maplecroft specified that in 2020, more than 34 countries had seen a significant increment in resource nationalism. Even Verisk Maplecroft discovered that almost 18 out of 34 are highly dependent on the minerals or hydrocarbons they exports and even predicts that the threat of isolationism may increase in the upcoming years if the attempts to plug fiscal holes in the wake of the pandemic.

On the other hand, the mining sector may bear all the brunt of new measures. As per the report, with some of the top procedures of copper and iron ore particularly in Africa and South America, it portrays that’s the top 10 countries that are at risk.

Verisk’s Hugo Brennan, Head of Mining Risk told CNBC on Friday, “It is entirely understandable that governments are casting around for additional sources of revenue in these fiscally constrained times,”

“Commodity prices have enjoyed a stellar start to 2021 and this puts the mining sector firmly on the radar of national governments.”

The top 10 in Verisk Maplecroft’s Resource Nationalism Index comprised Venezuela, the Democratic Republic of Congo, Russia, Zambia, Zimbabwe, Kazakhstan, North Korea, Tanzania, Bolivia, and Papua New Guinea.

Verisk Americas analysts Mariano Machado and Jimena Blanco stated that “These are countries most likely to resort to the bluntest instruments in the resource nationalism toolbox, such as direct expropriations with no, or inadequate, compensation.”

In this current year, North Korea made an announcement that a new five-year plan which the analyst had confirmed the decisions for increasing self-sufficiency and also centralized control over the economy.

In the meantime, Zambia has also entangled in a legal dispute with Vedanta Resources on its initiative to liquidate the company’s Konkola Copper Mines.

Well, the developing economies and emerging markets at the end of 2020 faced an average 10.9 percentage point year-on-year decrease in government revenue as a share of GDP, as per IMF data aggregated by Verisk. The harder part was sub-Saharan Africa with almost 12.55 percentage points hit and Latin America with around 8.7 percentage points.

In addition to the heavily-reliant nations mentioned above, there are many diversified economies that have seen a sharp but more nuanced push towards nationalism because of their resources in the last year.

Blanco said, “The countries to watch closest are the mining jurisdictions characterized by both a painful Covid-related economic contraction and a rise in these less explicit forms of resource nationalism. The governments in these countries are becoming more willing to intervene in the economy, use indirect expropriation, or demand increases in local content requirements — opening the door to a more sophisticated, but still disruptive, resource nationalism path.”

In South America, implementation of the “less bunt” mechanism tends to drive one out of two factors, s per analysts suggested ideology, as with Mexico or Argentina, or community pressure in the mining areas or broader society in Chile and Colombia.

On the other hand, in Sub-Saharan Africa, there was a more complex breadth of the underlying motivation.

The reporter mentioned, “For example, the interventionism seen in Liberia and Mauritania is driven by structural governance shortcomings, not nationalist sentiment.”

“In Mali, the political concerns of the transitional government are the issue, while in Guinea it is the need to maximize revenue from bauxite — both countries are looking to review existing contracts.”

Moreover, nationalist measures brought social pressure which tends to be more subtle, but it doesn’t carry much risk for mining companies Verisk analyst has argued by making use of the example of a debate on water rights in Chile which highly enhanced the regulatory burden and operating cost of the firms in the next decade.

At the time of the pandemic, the recent push towards nationalism has catalyzed the trends which have been reflected in the index since 2017.

Well, Verisk expects that the trend may spike sharply in the next 2years. In rentier mining economies,” these are the ones that primarily derive government revenues from the mining of a particular asset which the government has developed as a tendency to turn to the mining industry for backstopping the public finances.

Moreover, the analyst suggested that the mining companies may not need to see ESG factors closely in diversified emerging economies in which the convert methods of state interventionism have turned out to be the instrument of choice.

They cited, “Issues around income distribution, poverty, access to education and healthcare — to name but a few — can trigger socio-political processes that demand more from the state.”

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