COVID-19's Political Risk Impact: World Risk Review Findings

Significant change has occurred in many countries' economic, political, and security risks in the year to May 2020, indicates Marsh JLT Specialty's country risk ratings platform, World Risk Review (WRR). This reflects COVID-19’s global impact so far on countries, businesses, and people.

Countries' economic and currency inconvertibility and transfer risks saw the most widespread increases, while contractual agreement repudiation risks also increased in many.

Sovereign credit risks are unchanged in most countries, although more change is likely. Meanwhile, the short-term risk of strikes, riots, and civil commotion decreased in many countries.

WRR scores 197 countries on a 0.1-10 scale across nine risks, with 0.1 representing the lowest risk score and 10 representing the highest.

A selection of WRR ratings are summarized below.

Many countries' economic risks increased in 2020 so far
  Country Economic Risk Currency Inconvertibility and Transfer Risk Sovereign Credit Risk Contractual Agreement Repudiation Strikes, Riots, and Civil Commotion
Increase 189 136 59 55 65
Decrease 15 3 4 7 56
No change 5 51 126 122 71
Source: Marsh JLT Specialty

Country Economic Risk

The US saw its score increasing by 0.9, from 2.9 to 3.8. In March 21-27, the US posted seasonally adjusted unemployment claims of 6.6 million, ten times the previous single-week record posted in 1982.

Currency Inconvertibility and Transfer Risks 

Currency inconvertibility and transfer risk increased for 138 countries. Financial markets are becoming more risk averse, and countries with structural economic weaknesses — such as those posting twin fiscal and current account deficits — are particularly exposed to capital movements and experiencing currency sell-offs. Emerging market currencies in Mexico, Brazil, Russia, and India are experiencing pressure. Central banks are likely to continue drawing down on foreign reserves in the coming weeks to stem declines. The recent collapse in oil prices, a result of reduced demand and the Saudi Arabia/Russia dispute, is particularly elevating currency risks among oil exporters, as access to hard currency is reduced. An OPEC+ agreement to cut oil production by 9.7 million barrels per day on May 1, 2020 is unlikely to prevent price weaknesses in the coming months.

Sovereign Credit Risks

Governments across the globe are launching record stimulus packages, which will contribute to sharply widening budget deficits and significant increases in public debt levels in the coming quarters.

Emerging markets will face acute pressures, as government debt levels had already reached record highs prior to COVID-19. They now face recessions, currency pressures, and capital outflows. A number have already acknowledged mounting challenges in servicing debt.

Contractual Agreement Repudiation Risks

The investment environment is deteriorating, with contractual agreement repudiation risk scores increasing for 55 countries in 2020 so far. Spain and Ireland saw the largest increases (1.1 and 1, respectively).

The risk of expropriation and contract alterations is rising as many governments introduce emergency legislation, and infrastructure projects face delays. It is unclear how long governments will maintain an expanded role in economic activities. Scores may increase further in the medium to long term as governments look to expand revenues, particularly from natural resources, in the face of economic pressures and rising debt. The risk is likely to be particularly elevated in emerging markets dependent on commodity revenues.

Strikes, Riots, and Civil Commotion Risks

Strikes, riots, and civil commotion (SRCC) risks have seen a short-term improvement, as lockdowns limit the mass mobilisation of people and reduce the threat of social unrest. Seventy-one countries saw their SRCC rating improve. The largest improvement was in Romania (SRCC risk decreased by 0.7), which has been under a state of emergency since March 16, implementing strict control of movement.

Protest risks may increase in the longer term, however, as governments' handling of the pandemic faces increased scrutiny and austerity measures are introduced to tackle rising debt burdens. 

COVID-19 is reshaping the risk environment. Now, more than ever, companies can benefit from a nuanced understanding of their political risk exposures. WRR allows firms with international operations to monitor rapidly evolving political risk trends, through quantitative and qualitative insights.   

About World Risk Review (WRR)

WRR is Marsh JLT Specialty’s proprietary country risk ratings platform, which provides risk ratings across nine insurable perils for 197 countries.

Country risk ratings are generated by a proprietary algorithm-based modelling system incorporating 277 separate indicators.

Ratings are updated monthly and provide a forecast of the risk environment in the short to medium term. For each peril, countries are scored on a 0.1-10 scale, with 0.1 representing the lowest risk score and 10 representing the highest.

The nine peril indices provided by WRR mirror the insurance market’s approach to political and security risk.