China’s early emergence from the pandemic combined with the unprecedentedly large stimulus measures by the EU and US are widely expected to generate a near-term economic boost. This effect should benefit certain countries, including oil exporters, but the impact may be transitory and only delay a reckoning with social inequalities, unsustainable debt, and the energy sector’s green transition.
Nationalism is on the rise as governments fight for strategic resources. Whether in the form of mineral resources, vaccines and other medicines, secure supply chains, advanced technologies, or trade routes, these resources are all vital to economic recovery and political competition in an increasingly multipolar world.
The pandemic response adds a new weapon to the political arsenal of competing powers: vaccine diplomacy. Nations seeking influence are offering access to the vaccines as a bargaining chip with allies and trading partners. While COVID-19 responses obscured long-simmering geopolitical tensions in 2020, older tensions are expected to resurface as the pandemic comes under control and governments relax lockdowns, removing restraints that prevented outright interstate conflict.
Our Political Risk Map 2021 is based on data from Marsh Specialty’s World Risk Review platform. The country risk platform provides risk ratings for 197 countries across nine indicators relating to security, trading, and investments. Ratings are updated monthly and range along a 0.1 to 10 scale, with 10 representing the highest risk, and 0.1 the lowest risk. This World Risk Review platform is accessible to Marsh Specialty clients; for information, please contact your Marsh Specialty representative.
The nine risks tracked in the World Risk Review platform are:
- Contractual agreement repudiation risk.
- Country economic risk.
- Currency inconvertibility and transfer risk.
- Expropriation risk.
- Legal and regulatory risk.
- Sovereign credit risk.
- Strikes, riots, and civil commotion risks.
- Terrorism risk.
- War and civil war risk.
Marsh Specialty’s Political Risk Map highlights the risk by region and profiles nine countries based on the risks outlined above. Although the pandemic has intensified the risk outlook, there are still opportunities for corporate entities, financiers, and investors. Insurance-backed political risk and credit solutions can help to secure trade and investment capital, unlock liquidity, and enable growth to fuel and sustain recovery.
A variety of tools exist to manage political and credit risk, from both public and private sources. In addition to government-backed export credit agencies and multilateral organizations, a robust private political risk insurance market has developed to help investors and businesses weather political and economic crises. Solutions to protect against nonpayment risks, improve supply chain resilience, and protect people and assets in various countries can involve public programs, private insurance, or a combination of both.
The pandemic that heightened country economic risk for every nation in 2020 will continue to amplify political and economic challenges in 2021, as countries strive to recover amid a dramatically changing environment.
Country economic risk, like a pandemic, tends to be contagious and spread into sovereign credit risk, currency risk, and commercial risk. COVID-19 has widened the divide between rich and poor, setting some countries back decades in their efforts to reduce poverty. The World Bank estimates that globally an additional 88 million to 115 million people fell into extreme poverty in 2020, a number that could rise to 150 million in 2021.
Across multiple regions, food security, water access, and energy costs remain acute pressures that can lead to flashpoints of civil unrest. These pressures may also lead to a rise in nationalism and impact strategic resources. Government policies to address societal inequality will have a more prominent place in electoral platforms on both the left and the right, especially in middle- and low-income countries for decades to come.
Against this backdrop, many governments have quickly implemented fiscal and monetary policies to fuel a recovery. Marsh Specialty’s Political Risk Map 2021 shows larger increases than ever before in country economic risk across all regions, driven by increases in deficit spending, adding to sovereign and commercial credit risks in the less developed economies of the world.
Our analysis projects a growing disparity between emerging economies and industrialized nations, with the latter enjoying the benefits of high levels of government support and low borrowing costs (Figure 1). Strains on public financing in emerging markets will result from increases in sovereign indebtedness and may create unfavorable conditions for domestic and foreign-owned businesses.