What is sovereign risk and why does it matter? Check out the rebuttal to Margaret McKenzies article in ABCs The Drum Wind Industry Employee: What nonsense, Margaret McKenzie. First youre narrowly defining sovereign risk, out of touch with its common use. Yes the RET has nothing to do with exchange rates or debt issuance, so using that definition youre right that its removal isnt sovereign risk. And your second definition that sovereign risk relates to any investment risk related to changes in government policy is a spurious straw man. No serious investor considers sovereign risk in that way. A pragmatic definition of the phrase sovereign risk is the risk of a country reneging on a contract or investable commitment. If a country commits to a policy that investors depend upon, the investors weigh the risk of that sovereign reneging on the commitment. Whether its a bond issuance or a renewable energy incentive, investors are being asked to commit funds for the long term. If Australia reversed its renewable energy target (without compensating the investors) it would be grouped with other nations that renege on their obligations as high sovereign risk. Your article doesnt mention that Australia legislated the RET with bipartisan agreement, for fixed volumes of renewable electricity to be generated until 2030. It was designed for long term investment, and investors have committed $20bn of their funds as a result of that legislation. Bipartisan legislation is a serious sovereign commitment and its nonsense to assert that getting rid of the RET is a simple change of government policy. Reneging on the RET damages existing investment in Australia, damages Australia?s reputation as a stable regulatory system that supports investment, and mocks Australia?s claim of being open for business. To investors, damaging the RET is a definitive example of sovereign risk.
Posted on: Fri, 14 Nov 2014 00:59:13 +0000