Managing Geopolitical Risk Amid Global Instability
Political and credit risks in both developed and developing markets, including changes in trade policy by Western countries, will continue to challenge multinational businesses in 2017 and beyond, according to panelists on Marsh’s The New Reality of Risk® webcast.
Both the 2016 US presidential election and the UK’s decision to leave the European Union reflect the rise of anti-establishment, nationalist, and populist forces in several major economies, said Yoel Sano, head of global political and security risk at BMI Research. In developed economies, there is also a growing backlash against globalization, which has contributed to opposition to free trade and the offshoring of jobs to developing countries.
A movement away from multilateral trade agreements and cross-border cooperation by developed economies could lead to unpredictability in developing economies, said Stephen Kay, US leader of Marsh’s Political Risk Practice. A change in US trade policy could also adversely affect countries that depend on the US for a majority of their exports, including leading to insolvencies, said Liam Duffy, global client relationship management leader in Marsh’s Trade Credit Practice.
Other key risk issues for global businesses include:
- A shift toward a “multi-polar” world. A more aggressive US foreign policy is expected under the new administration, Sano said; meanwhile, China, Russia, and major regional powers such as Turkey, Iran, India, and Japan are becoming more influential. This could lead to clashes between these countries.
- Election and succession risks. Potential changes in leadership in the near future in developing economies, including Angola, Cuba Cameroon, Equatorial Guinea, Iran, Kazakhstan, Oman, Saudi Arabia, and Zimbabwe, could generate political risk. Meanwhile, important elections in China, France, Germany, Italy, and South Korea are scheduled for 2017.
Although geopolitical risk has not historically been a focus area for financial and treasury professionals, it appears to be gaining importance. Nearly half of all respondents to the 2017 Association for Financial Professionals Risk Survey said that their leadership and boards are concerned about geopolitical risk. And more than half of treasury and financial professionals responding to the survey said they have taken into consideration the effect of geopolitical risks on corporate earnings.
In addition to considering the purchase of political risk and trade credit insurance, financial and treasury professionals should review credit-control procedures and evaluate the potential impact of political risk events on their customers and suppliers, said Craig Martin, director of executive programs and treasury practice lead at the Association for Financial Professionals. Finance and treasury departments can also protect balance sheets and corporate operations by maintaining adequate liquidity, building resilient supply chains, and protecting employees in crisis situations.