Political Risk in a Disrupted Global Landscape
Support for populism and protectionism is becoming a major movement in nations around the world. In the United States, the new administration is widely expected to change foreign policy, which will in turn create a ripple effect on political risks and trade credit globally.
The Eurasia Group, a leading political risk research and consulting firm, cites "independent America" as a top risk for global stability and warns that 2017 will see a "geopolitical recession" that marks "the most volatile political environment in the postwar period, at least as important to global markets as the economic recession of 2008." Among the other top risks for the year, Eurasia Group sees destabilization in Asia, weakening of U.S. allies in Europe and a failure of structural reforms in emerging economies.
That is a startling assessment indeed. The overarching theme is greater uncertainty. It simply is not yet clear how markets will respond to changes in U.S. foreign policy and reshape the global political risk landscape. The less certain things are, the more important it will be for international businesses to consider their options for mitigating political risk and protecting the value of their contracts with foreign suppliers.
Among the other top risks for the year, Eurasia Group sees destabilization in Asia, weakening of U.S. allies in Europe and a failure of structural reforms in emerging economies."
A brief look at regional challenges shows a significant amount of complexity and volatility. Risk seems to be everywhere.
Asia:Political tensions are high, with China's Communist Party set for leadership changes at its 19th party congress in the second half of this year, amid mounting domestic economic pressures and territorial disputes with its neighbors. Japan may enter a period of isolation, depending on how relations between the United States and Russia -- two of Japan's largest trading partners -- evolve. North Korea remains an agent provocateur as it seeks to expand its nuclear missile capabilities.
Europe: The future of the European Union remains in question, following the U.K. withdrawal in "Brexit," a process that is far from settled. Germany finds itself stretched taut by Brexit, growing talk of a similar exit in France, and political tensions with Russia. The possibility of major economic reforms in most of Europe is at best neutral and negative in some nations, according to the Eurasia Group.
Latin America: While Mexico and other nations, such as Argentina, Colombia and Peru, have made great strides in recent years with reforms to provide stability and growth, the immediate future is uncertain. U.S.-Mexico relations are particularly strained following the new administration's plans to crack down on immigration and impose tariffs. Brazil continues to struggle with an economic recession.
Middle East: Ongoing civil conflicts, the exodus of refugees and oil prices hovering well below their historic high mean that economic growth and stability continue to evade many of the region's countries. A tenuous agreement by the Organization of Petroleum Exporting Countries to reduce oil production in an effort to raise prices appears to be offset by production increases in the United States, a major consumer of Middle Eastern petroleum. If global supply outpaces demand, oil prices may fall further, exacerbating the region's economies.
Africa: South Africa, once a model of economic growth and a leading force for stability in the sub-Saharan region, is facing financial struggles amid domestic political battles. South Africa's sovereign credit rating is at risk of downgrade to "junk" status, which would deter investment.
At first glance, there appears to be much more bad news than good on the political risk horizon. As with any risk, opportunity exists for those able to look deeper and forge the right partnerships. Uncertainty is a constant, but there are ways to reduce it. Businesses can protect their people, assets, investments and cash flows with proper risk management. Political risk and trade credit insurance are valuable tools, especially in the current environment.
At XL Catlin, we look closely at opportunities to make a difference for our customers. We offer broad coverage and vast experience that supports organizations willing to take risks. Ask how we can help your organization to better understand political risks and credit markets, to seize opportunities around the globe.
About the Author
Dan Riordan is President of Global Political Risk & Trade Credit Insurance at XL Catlin. Before joining XL Catlin, he held various senior executive roles in political risk, specialty and global corporate property and casualty insurance at a leading global insurer. He has had a long association with the Berne Union, an international association of export credit insurance organizations, serving as president from 2013 to 2015.