Corporates’ global ambitions add political risk to agenda

The past decade has international expansion by many corporates expanding beyond their home market, coupled with new and expanding risks around the world.

As a result, multinational financial and risk professionals must now be prepared for virtually any type of political or economic risk threat in both developed and emerging markets, says Marsh. The risk advisory and insurance broking giant this week issued its ‘2016 Political Risk Map’, developed in partnership with BMI Research. This complements the annual Global Risks Report that was published last week by the World Economic Forum (WEF).

Marsh and BMI identify the top political risks facing businesses and investors in the year ahead as follows:

Terrorism

The ‘war on terror’, which began in earnest after the September 11 attacks on the US in 2001, is likely to continue for at least another decade, according to BMI.

“The US and Russia have learned lessons in the past about the difficulty of fighting ground wars for extended periods of time in the Middle East and Afghanistan, and neither country appears willing to risk repeating those earlier experiences,” says Yoel Sano, BMI’s head of global political and security risk.

The risk of terrorist attacks is expected to persist in North American, European, and Asian countries, even as they introduce stronger security measures. The threat of terrorism has also increased concerns in Western countries about immigration policy, and has proven to be a boon for Europe’s right-wing political parties.

Emerging economies

China continues to struggle as the country’s economy shifts its focus from investment to consumption. In Q3 2015, real gross domestic product (GDP0 growth in China fell to 6.9% year over year, the slowest growth since Q1 2009.

Economic reforms, a weak real estate market, over-leveraging of corporate entities, and rising wages – which will eliminate a significant competitive advantage for Chinese manufacturers – will continue says BMI, which forecasts real GDP growth of 6.3% this year

In Brazil, fixed investment and household consumption remain weak, driven by rising job losses, high inflation and interest rates, and a probe into alleged corruption at Petrobras; BMI forecasts GDP contraction of 4.4% in 2016. Meanwhile, Russia’s investment growth has been minimal since 2012, Consumption will likely recover slowly, but inflation will stay high and nominal wage growth remain subdued. BMI forecasts real GDP growth of 0.5% in 2016.

A bright spot among emerging economies is India, helped by prime minister Narendra Modi’s business-friendly government. BMI forecasts real GDP growth of 7.2% in 2016.

The 2016 US presidential election

Foreign relations and defence policy, already areas of focus in the run-up to the election, have moved further up the agenda following recent terrorist attacks. With polls showing national security to be a major concern for voters, foreign policy will remain a key theme.

“Presidential candidates in both major political parties have criticised what they regard as the Obama administration’s ‘aloof’ approach to foreign policy, which they see as contributing to China’s assertive stance in the East and South China Seas, Russia’s intervention in Ukraine, and Islamic State’s growth in Iraq and Syria,” says Sano. “Regardless of the election outcome, the next president is likely to take a more interventionist approach.”

Europe’s anti-establishment parties

Terrorism, the migrant crisis, austerity measures, and other economic factors have assisted the rise of anti-establishment parties in Denmark, France, Germany, Greece, Spain and the UK.

In most cases, these parties do not appear likely to win power but could influence rhetoric and public policy as members of ruling coalitions with other parties. Many, particularly on the far right, espouse tougher stances on immigration and defence amid the migrant crisis and following the Paris attacks. Their growing power is likely to continue to test the European Union’s (EU) principle allowing for the free movement of workers.

Falling commodity prices

Oil prices have steadily dropped since mid-2014; Brent crude oil falling to US$38 per barrel in December 2015, the lowest price since July 2004.

BMI forecasts an average price for Brent of US$42.50 per barrel in 2016, which will continue to negatively affect the economies of oil-exporting countries, adding to their political risks. Those at highest risk include Angola, Congo-Brazzaville, Equatorial Guinea, Iran, Iraq, Nigeria, and Venezuela. Low oil prices could also increase political risk in Russia.

“Many net oil exporters already faced significant political risks before the drop in oil prices, which could be exacerbated if prices remain low,” says Sano. “In Venezuela, for example, voter dissatisfaction with the poor economy and high inflation contributed to the opposition party’s victory in December’s legislative elections.”

Beyond oil, prices for a number of other agricultural commodities, livestock, and precious and industrial metals have fallen since early 2014. Coupled with rising interest rates and the slump of currencies against the US dollar, the drops portend an increase in political risk in many emerging markets whose economies rely on commodities exports, such as Brazil. The drop in prices could also have lasting economic effects on resource-rich developed economies, including Canada and Australia.

Succession risks

BMI reports that more than 20 countries have aging, longstanding leaders but no clear plans or frameworks for the transition of power. When such leaders have died or resigned in the past – for example, in Indonesia, Iraq, Libya, Yugoslavia, and Zaire – civil war or substantial political unrest and violence has often resulted.

Countries that could experience similar turmoil in the years ahead include Angola, Cameroon, Cuba, Equatorial Guinea, Iran, Kazakhstan, Oman, Saudi Arabia, Thailand, Uzbekistan, and Zimbabwe.

Centralisation vs. federalisation

The 2014 referendum on Scottish independence is one example of the pressures that governments across the world face to devolve more power to their regions.

Similar pressures have been seen in:
• The separatist conflict in Eastern Ukraine.
• India, where a popular movement led to the division of Andhra Pradesh into two separate states in 2014.
• The Houthi rebellion and Southern separatism in Yemen.
• A referendum on the independence of Catalonia, which was blocked by the Spanish government.
• Hong Kong, where political protesters have sought greater autonomy from the Chinese government.

“We expect the debate between centralisation and federalisation to continue, although we do not expect to see many new sovereign states formed in the next five years,” says Sano. “Rather than seeking outright independence, many separatists are likely to settle for greater autonomy, as appears to be the case in Scotland.”

Rivalries among “great powers”

Continuing tensions among the world’s three “great powers” – the US, Russia, and China – are expected and between these countries and various regional powers.

In 2016, tensions could continue to build between:
• China and Japan in the East China Sea, and China and the US in the South China Sea, stemming from China’s assertion of territorial rights and construction of artificial islands and airstrips.
• North Korea and South Korea, especially after the North’s recent announcement in early January of a successful nuclear bomb test. Any conflict could easily draw in the US, China, and Japan, which have strong interests in the security and stability of the Korean Peninsula.
• Russia and the North Atlantic Treaty Organisation (NATO) in the Baltic states or Eastern Mediterranean, as NATO extends membership invitations to more countries.
• Russia and Turkey, exacerbated by last November’s downing of a Russian military jet in near Syria’s border with Turkey.

“Both China and Russia appear intent on flexing their muscles and playing a greater role in the politics of many regions, as evidenced by China’s plan to build a military base in Djibouti, in the Horn of Africa,” says Sano. “We expect that rivalries between both the great powers and regional powers like Turkey will continue to develop, including some direct confrontations and proxy wars in the coming years.”

Managing the risk

Multinationals can prepare for the increasingly risky geopolitical environment in several ways, say Marsh and BMI:

Manage credit risk: When a government collapses or descends into crisis it can lose its ability to honour financial obligations; often creating a chain reaction of default that spreads into the private sector. Businesses should review their credit risks and credit-control policies and procedures, and evaluate the potential impact of political risk on the countries in which they, their customers, and suppliers operate.
Build resilient supply chains: Before a crisis develops, an organisation should understand how a crisis in one country can disrupt its global supply chain. Businesses should also have response plans in place to allow for the use of alternative suppliers and/or ports, and to communicate with customers and suppliers.
Protect people: Developing and testing crisis plans in advance helps ensure effective communication during and post-crisis.
Protect assets through insurance: Credit and political risk insurance can protect against various risks, including expropriation, political violence, currency inconvertibility, non-payment and contract frustration.

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