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Why COVID-19 Could Mean Heightened Risk in Emerging Markets

As the impact of the novel coronavirus (COVID-19) continues to be felt around the world, organizations and governments are facing new and unprecedented risks. In June 2020, the World Bank forecast that the global economy was set to shrink by more than 5 percent this year due to COVID 19 — the deepest worldwide recession for decades. As suggested in Aon’s 2020 Risk Maps, this economic crisis may have political risk ramifications.

For many investors in emerging economies, COVID-19 heightens the risk of political interference and even the confiscation of privately held assets expropriation, Risk Maps reports. This can occur in the power and energy industry, where projects in emerging market countries can be billion-dollar investments involving significant debt and equity, and are reliant on agreements with the local governments and power purchase contracts.

At the same time, those emerging market countries enter the COVID-19 economic downturn staring at $17 trillion in government debt. As economic activity declines and those countries try to cope with debt levels, one area they might look at are some of those foreign companies’ energy and power investments — projects based on agreements negotiated before the COVID-19 pandemic.

Some believe that scenario is playing out in Zambia, where copper price declines because of the pandemic are adding to pressure on the government’s ability to service its debt. It has been suggested that the government has destabilized the energy sector by expropriating crucial infrastructure belonging to Copperhead Energy — a suggestion the government denies.

As the risks of expropriation increase, they may take a more subtle form. “Traditionally, expropriation has been more clear cut,” says Mairtin O’Griofa, executive director, Political Risk and Structured Credit, at Aon. “In the past, it would have been as blatant as the government taking over an oil or gas field. But it’s become a bit more sophisticated and incremental. Today the expropriation may be with respect to the contracts that go with the project.”


Investors in major projects are concerned about policy continuity in the countries where they invest. While that continuity is more likely in developed countries, it might not be the case in emerging markets. Beyond policy continuity, another concern for investors in those countries is political interference, especially contract expropriation.

At its worst, expropriation takes the form of outright nationalization of assets, though events like nationalization of mines in Zambia in 1969 or Sierra Leone in 1968 have become less common.

Today, political interference in emerging market countries is more likely to take the form of, for example, increasing tax pressures, implementing export restrictions, heightening local content requirements, or enforcing more stringent regulation and contract reviews.


The economic impacts of the COVID-19 pandemic increase the likelihood of hard-hit countries seizing foreign-owned businesses — including energy operations — or abandoning contracts and project agreements.

“We could have knock-on effects from economies affected by COVID-19,” says O’Griofa. “Agreements between governments and foreign investors may get distressed and, in certain cases, canceled or rewritten because that country cannot honor the terms of the deal anymore.”

Existing power purchase agreements (PPAs) supporting many of these projects — the vast majority of which are for renewable energy projects — are based on pre-COVID-19 levels of economic activity. “We anticipate that power transactions could be at risk because of COVID-19. The PPAs that are in place would have been predicated on economic activity levels before the shocks of the economic downturn,” says Sarah Taylor, head of Political Risk and Structured Credit at Aon.

We could also see countries seek to become more self-sufficient as they’ve seen the impacts to global supply chains during the pandemic.


Many emerging market countries are increasingly interested in developing more renewable energy sources, prompting investments in massive wind farms, solar farms and hydroelectric projects. Some of these projects could cost billions of dollars, with the companies developing them looking to protect their investments through agreements with the local governments. Businesses involved in such massive overseas projects — and the investors financing them — are concerned about managing country risks and joint ventures associated with local partners in emerging markets.

“In Asia, for instance, a number of European companies are looking to develop offshore wind farms in places like China, Japan, Korea, Taiwan, which are new territories for them,” says O’Griofa. “Securing licenses often requires projects to have a certain level of local content, so investing companies have to enter into purchase or tariff agreements with local governments, or joint venture agreements with local companies.”

Many power and energy projects involve significant amounts of public and private debt, prompting project owners to seek ways to protect revenue streams associated with the project.


As part of a global shift toward renewable sources of power, major energy companies may look to decommission or sell off projects.

“We are seeing the oil and gas majors refocusing more on the renewable space,” says Taylor. “When an asset is nearing the end of its life span, they may wish to divest from a project and look to move on.”

An acquirer of this asset should carefully consider political-risk impacts, especially in the current environment, as part of the M&A due diligence process, Taylor says.


As the risk of expropriation rises, energy industry companies investing in emerging market countries will need to stay up to date on the latest developments in the sector.

They might focus on investing in countries with strong bilateral investment treaties with their own country of origin that include legal protection and recourse in the event of expropriation without compensation, says O’Griofa. They also should consider, where possible, international arbitration in their contracts with host countries.

Political risk insurance can also help companies address certain risks and protect revenue streams, says Taylor.


While the COVID-19 pandemic heightens the risk of political interference and expropriation in many parts of the world, the situation can be managed in certain respects, allowing investment to continue. “Companies will need to be pragmatic,” says Taylor. “We are going to see more investment in energy and power projects, and these may well be affected by COVID-19.