United Kingdom

Political risk concerns heightened by COVID-19

Aon’s Risk Maps 2020 reveal the world’s hotspots for risk related to political changes and instability

According to Aon’s latest Risk Maps 2020, 19 countries currently have a very high rating when it comes to political risk. While the risk improved in some countries such as Cote d-Ivoire (from high to medium high), Mexico (from medium high to medium) and Pakistan (from very high to high), others such as Iran, the Maldives and Panama saw a deterioration – with Iran moving to very high risk.

Of course, political risk isn’t confined to developing economies as China telecoms provider Huawei recently found out following a decision by the UK government to exclude the company from the UK’s 5G infrastructure, but COVID-19, politically motivated trade restrictions, political interference through government expropriation and contract change, and currency risk are all likely to have an impact on the levels of political risk in emerging and frontier markets in 2020; factors that businesses and investors will need to consider carefully when operating in these territories.

The pandemic impact

Political risk tends to thrive in areas where, according to Aon’s Risk Maps 2020, political violence, institutional and regulatory risk and economic conditions allow it to build. The COVID-19 pandemic will have a major impact on all these subsets of risk not least as the global economy slows and even reverses, creating economic pressures. As Aon’s report finds: “The introduction of heavy fiscal stimulus packages will increase the risk of debt defaults and hence increase the risk of sovereign non-payment in many emerging markets.” 

Seven countries report a change of political interference – Aon’s risk map reveals Eritrea, North Korea and Bolivia as the worst performers – which reflects the “increase in business environment disruptions from blockades, sanctions and the surge in resource nationalism.” Is it likely that COVID-19 will exacerbate some of those trends? Populism of course can thrive in this environment and may encourage governments to take more action. Notably, political interference can show itself in more indirect forms in emerging markets such as through increasing tax pressures, and export restrictions. Investors may decide to avoid countries that are less welcoming to overseas investment or look to mitigate the risk.

Currency risk

Elevated currency risk is also a key factor for investors to consider. Argentina’s currency crisis, for example, saw it score the worst spot return of -73% amongst other emerging economies over a three-year period. These unpredictable fluctuations mean that businesses “stand to lose or gain dramatically from currency movements.” Countries may also decide to impose capital controls which, again, can make it harder for businesses to operate in a particular country.

Sanctions are another expression of political risk that have been high profile in recent years although their effectiveness varies. “A three-year trade blockade has not dented Qatar’s GDP but the re-imposition of U.S. sanctions on Iran has caused the Iranian economy to plunge,” says Aon’s report. The US is a major driver of sanctions and other countries in the cross hairs include Cuba, North Korea, Sudan, Syria, and Venezuela. It’s unclear how the picture will change particularly while the identity of the next US president is unknown but it’s critical, says Aon’s risk maps report, that businesses “carry out appropriate due diligence concerning sanctions when dealing with third parties and suppliers, as well as when acquiring new businesses.”

Mitigate the risk

>Whatever the nature of the political risk for businesses operating both within their home country and in foreign jurisdictions, the increased volatility and complexity of the risk makes it more important that organisations take steps to mitigate the risk where possible. Political risk insurance can play a key role in protecting a firm’s assets and investments. “There is market appetite for risks linked to sanctions exposure and firms operating in at-risk countries should consider whether such coverage can provide them with a degree of protection for their investments and cashflow,” concludes Aon’s Risk Maps 2020.

To find out more, download Risk Maps 2020 – Aon’s guide to political risk, terrorism, and political violence.