Emerging Market Instability Tops Political Risk Concerns
The surprise election results in the US and United Kingdom may have grabbed your attention, but don’t take your eyes off of political risks stemming from emerging markets. Although exposures from election results should not be downplayed, greater political risk still lies in emerging markets. And events in developed economies can have major repercussions for those developing markets.
Looking Past the Headlines
The election of Donald Trump in the US and the UK’s vote to leave the European Union in 2016 will have significant implications for the US and UK, and caught many observers off guard. They also reflect two broader trends: The rise of anti-establishment movements across developed economies and a backlash against globalization.
While these events captured the attention of national and international media, it’s important to look at them in context. Even though the US and UK may be perceived as less predictable, both countries — along with most other developed markets — remain stable democracies. For global businesses with assets and investments in these countries, the relative political risk is quite low.
Pressing Emerging Market Risk
For multinational businesses, the most substantial political risks continue to be in developing markets. As their economic growth has slowed in recent years, many of these countries have seen greater political risk in the form of political violence, expropriation of corporate assets, contract frustration, currency inconvertibility, and more.
The US, UK, and other developed economies have historically spearheaded globalization, to the benefit of these emerging markets. But the US election, Brexit vote, and broader rise of anti-globalization movements means that the world’s largest economies will likely pull back from multilateral trade agreements and cross-border cooperation in the years ahead. And that will only exacerbate political risk in the developing world.
Managing Political Risk
To manage their political risk in developing economies, businesses can consider several strategies. Among other steps, they can:
- Assess their business’s political risk and tolerance for large potential losses through risk mapping.
- Mitigate some political risks by improving their standing with local governments through community relations and other corporate citizenship efforts.
- Structure overseas investments around bilateral investment treaties (BITs), where two countries pledge to treat each other’s’ investors fairly in their home territories. In the event of a breach of contract, expropriation action, or other political risk loss, BITs can provide a mechanism for resolving disputes, which can better ensure that foreign operations will be protected.
- Consider political risk insurance. A multi-country approach allows firms to obtain broad, usually affordable insurance protection for all of the countries where they have assets and operations. Such coverage is also available on a single-country basis.
For more information, listen to a replay of Marsh’s New Reality of Risk webcast.