The pandemic’s economic and social impacts are driving significant shifts in global political risk — introducing new dynamics and accelerating existing geopolitical megatrends, such as trade protectionism and the transition to a multipolar world order.
The deepening Sino-American rivalry has accelerated since the onset of COVID-19. The politicization of trade and investment relationships has extended to public health, with leaders in both countries routinely blaming the other for the pandemic.
Cooperation between China and the US on the pandemic has been weak, and tensions have risen over Hong Kong SAR, Taiwan, and the South China Sea. Our expectation that tech firms will be increasingly caught in the crossfire is playing out, while countries find themselves under geopolitical pressure to choose sides.
In July 2020, the UK government announced that Chinese firm Huawei’s technology would be banned from its 5G networks. As the US presidential election approaches, relations are likely to deteriorate further.
Outside of the US-China rivalry, recent months saw a Sino-Indian confrontation in the Himalayas in which at least 20 troops were killed. Tensions on the Korean peninsula also look set to rise, with North Korea severing communication lines with the South and blowing up a joint liaison office in June 2020.
International focus on COVID-19 may also be masking simmering tensions between Iran and the US. Relations between the two countries remain weak, following the January 2020 US drone strike that killed a leading Iranian general.
In July, two US fighter jets approached an Iranian passenger plane in Syrian airspace, and days later Iran’s revolutionary guards fired a missile at a replica aircraft carrier in the Strait of Hormuz.
Almost two-thirds (64%) of the countries in the region experienced an increase in their country economic risk rating of more than 1 between January and July 2020. In the same period in 2019, no country posted a rise of this magnitude. Only 23% of countries posted any increased economic risk.
Middle East and Africa
Many governments across the region face particularly acute debt and fiscal pressures. Almost half (47%) of the countries in the Middle East and Africa have seen their country economic risk rating increase by more than 1 between January and July 2020.
More than half of the countries in the Americas saw their country economic risk rating increase by more than 1 between January and July 2020. Pandemic containment measures have frozen economic activity in many states, while some have faced collapsing tourism revenues, or weak global commodity prices.
Global Economic Impact
Since January 2020, all 197 countries rated by Marsh JLT Specialty’s World Risk Review have seen their country economic risk increase, compared to just 60 countries in the same period in 2019. Moreover, risk ratings have increased by a larger magnitude compared to the same period last year.
Between January and July 2019, 97% of the economic risk ratings that increased did so by between 0.1 and 0.4, compared to just 7% in 2020 (see Figure 1). In 2020, 40% of ratings increased by between 1 and 1.4. No scores rose by this magnitude in January-July 2019.
The International Monetary Fund (IMF) forecasts that the global economy will shrink by 4.9% in 2020. With many governments looking to ease pandemic lockdown measures, attention is focused on the shape and size of an economic recovery.
A recovery is difficult to forecast, however, given the significant uncertainty over governments’ ability to contain and manage COVID-19, particularly without a vaccine.
Recent weeks have exposed these challenges. While economic data from Europe showed a tentative move toward recovery, fears of a second wave of infections may yet undermine momentum.
As a result, the post-COVID recovery is likely to be uneven across countries and sectors. Countries that entered the crisis with weaker fundamentals are likely to face deeper economic scars, while those able to deploy large fiscal packages and effectively manage the virus are best placed for recovery.
Trade tensions are also likely to amplify, if or when a global economic recovery takes hold. The drivers of increased trade protectionism remain in place, and are likely to be exacerbated by deteriorating US-China relations during the pandemic. The Phase One trade deal reached between the two states is at risk of being abandoned, posing risks to a post-COVID recovery in global trade volumes.
With some exceptions, emerging markets (EMs) will benefit from a recent return to stability in global financial markets, allowing most of them to avoid the severe balance of payments pressures caused by rapid capital outflows.
However, long-term debt sustainability in many EMs will be weakened by the pandemic, as governments deploy additional spending and weak economic activity drags on revenues.
In some cases, such as South Africa, COVID-19 has exacerbated existing weaknesses in public finances, while the simultaneous drop in global commodity prices has also hit many oil-producing nations.
Strained government finances could also push some governments to seek alternative sources of revenues, possibly leading to contract alterations or expropriation in more profitable sectors.
Regulatory changes may look to increase government royalties, potentially weakening operating environments.