Business adjusts to a riskier world

Two weeks into the Trump presidency, the geopolitical risk concerns of businesses around the world are changing. Marsh, the global risk advisory and insurance broking giant issued its latest annual Political Risk Map this week and reports that in recent days it has received several inquiries from corporates and investors on potential financing for projects in Mexico and whether to proceed in the face of the new US president’s threatened imposition of tariffs.

Even before the new resident of the White House had taken up occupancy, America’s second-largest car producer, Ford, had reconsidered plans to build a new US$1.6bn plant south of the border at San Luis Potosi and to instead expand an existing facility in Michigan. However, along with competitor General Motors, the group has already criticised Trump’s order halting immigration from seven Middle Eastern countries despite its fortunes being highly dependent on the new administration’s corporate tax, trade and air quality policies.

According to Julian Macey-Dare, international leader, credit and political risk practice at Marsh, as recently as three to four years ago the main focus of political risk insurance was more on the world’s emerging markets than its developed ones. Potential government appropriation of resources or nationalisation were among the main concerns, but the focus has shifted to populism, protectionism and the continuing threat of terrorism.

“There was much speculation over Brexit and the drivers behind it,” he said. “These certainly include immigration and employment, but it was also evident that people want to have greater control over their own destiny.” This mood had been detected by Donald Trump and was increasingly evident around the world.

Colleague Rob Deeley cited the question now being posed by publications such as The Economist of whether the curtain is now coming down on the era of globalisation after more than 40 years. “In many cases, companies that have pursued greater globalisation have seen lower returns on equity (RoE) than those that haven’t,” he noted. “So it’s possible that we could be moving into a period marked by a degree of de-globalisation and lower investment in emerging markets.

“Trump’s actions certainly make it more difficult for companies to invest on a global basis and it appears that he may have already discussed repatriating jobs back to the US with multinationals such as Apple and Ford. So the actions of the domestic government then become more important – will Trump simply encourage bringing jobs home to the US, or will he take rather stronger action?”

Macey-Dare also observed that Wall Street has so far been pleased by Trump’s pledge to cut back regulatory red tape, but the speed and extent to which this is done needs to be finely judged. “Doing too much, too soon could risk a repeat of the bursting of the credit bubble in 2008, the results of which still haven’t entirely dissipated.”

Peak globalisation

In its commentary accompanying the 2017 Political Risk Map, Marsh notes that the Brexit vote and Donald Trump’s election both defied conventional wisdom, as the status quo option or candidate failed to prevail. Anti-establishment, nation-first parties around the world paid close attention to these events, which were driven by factors that included surges in immigration, increased terrorism threats and the continuing knock-on effects of the 2008-09 and subsequent financial crises.

These themes will continue to amplify global political risks in 2017. As many countries shift their focus inwardly and become more protectionist, it appears we may have reached “peak globalisation”, potentially stifling global economic trade moving forward.

Among the key issues that should be watched for in 2017 are:

Europe:
The UK’s referendum decision last June in favour of leaving the European Union (EU) created uncertainty surrounding future trade negotiations between the UK and the EU’s remaining member states, giving multinationals cause for concern.

Challenges include striking a balance between delivering on promises to the electorate and enacting sufficiently pragmatic policies to satisfy the concerns of the establishment and businesses.

At the same time, there is increasing support for anti-establishment forces in the Netherlands, where elections will be held in mid-March, France (late April), Germany (late September) and Italy (no later than May 2018), potentially dealing further blows to the European project. As Macey-Dare observes: “The prevailing rhetoric in these countries is similar to that behind Brexit and Trump’s election, raising questions about the EU’s sustainability.”

North America:
In terms of US foreign policy-a key concern-much depends on whether president Trump and his administration aggressively shake up the international system or adopt more pragmatic policies.

What seems clear is that the US is likely to pursued a much more assertive foreign policy than was the case under former president Barack Obama. This may lead to greater friction between the US and its main trading partners and allies, as well as with its geopolitical rivals.

Asia:
Hong Kong’s elections are set for March, China’s national congress meets in the autumn and South Korea’s elections are scheduled for December. These events will help set the political scene in each country, the region and globally for years to come.

Middle East:
Iran’s presidential elections in May will decide whether relatively moderate president Hassan Rouhani wins a second term. The outcome will play an important part in determining whether Tehran seeks to preserve the landmark 2015 nuclear deal with the world’s major powers, which prohibits ballistic missile tests designed to deliver a nuclear warhead.

Latin America:
Political crises in Brazil and Venezuela will likely take centre stage in 2017, although the two countries may be headed in opposite directions. Brazil still faces the potential for disruptive corruption scandals, but appears headed in a positive direction. Venezuela, by contrast, is in its fourth year of increasing political and economic crisis.

Pacific:
Australia epitomises the line that must be walked in 2017 by many stable countries. It has a strong economic relationship with China and deep security ties to the US. Elections in New Zealand this September will hold little of the drama likely to be seen in other countries.

Global:
The countries with the highest political risks generally follow geographical trends. Emerging markets, particularly those in North Africa and the Middle East, show the greatest instability as conflicts, civil war and socio-economic instability affect Syria, Sudan, South Sudan, The Central African Republic, Yemen and other countries.

This year is also likely to see continued growth in rivalries between world powers, such as those witnessed in recent tensions between China, Japan and South Korea in the South and East China Sea and in Russia’s growing assertiveness in peripheral countries and in Syria.

In addition, while Zimbabwe – where 92-year old Robert Mugabe has ruled since 1980 – is the most obvious example, several countries have elderly leaders and succession concerns over who will follow them.

Insuring against political risk

Multinationals’ interest in political risk cover has steadily grown since the late Nineties when, as Deeley noted, there was rather less uncertainty over the economic and political outlook.

The steady disintegration of this level of assurance post-2000, coupled with some hefty claims payments in the past couple of years, might suggest that there will be less capacity in the political risk insurance market and upward pressure on premiums. However, Marsh reports that with huge amounts of surplus capital still available, capacity is plentiful and premium rates stable apart from a handful of regions regarded as high risk. Four or five new insurers have entered an already crowded market over the past year.

As an insurance broker the group also assesses the industry sector in which corporate clients operate, rather than the regions they do business in, when devising appropriate political risk cover. This is particularly so for multinationals, which will have employees, assets and trading arrangements spread across many countries. “Many clients aren’t looking at risk tomorrow but risk in 10 or 15 years’ time and their primary concern is operational security,” says Macey-Dare.

To access the Political Risk Map 2017 click here.

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