Multinationals face new levels of political risk, warns Marsh

Multinationals face “unprecedented uncertainty” caused by growing political risk, Marsh warned on publishing its Political Risk Map 2019. Marsh added that trade disputes, protectionism and geopolitical tensions have created an “unstable” environment for multinational companies with direct foreign investment. The updated Political Risk Map uses data from Fitch Solutions to rate more than 200 countries’ political, economic and operational stability. Marsh states that globally, businesses face a new level of political risk and “have arguably never faced such a breadth of challenges as they do today”. Very few businesses are protected, it adds. “From emerging economies to mature ones, business and trade are increasingly susceptible to uncertainty, with political risks posing a threat to their business interests,” Marsh says. US-China tensions, trade wars, Brexit and changes within the eurozone are all ongoing risks that will define the political risk landscape this year, Marsh says. As are nuclear programmes in Iran and North Korea, as well as tensions between Russia and the West. Russian links to interference in domestic US and EU politics will again be a feature this year. Marsh notes that the Skripal poisoning in the UK and laboratory hacking in Switzerland have added to tension between the West and Russia. This could drive more US and/or EU sanctions on Russia, it adds. “Transition to a more multi-polar world order of protectionism is likely to continue,” along with slowing globalisation, Marsh says. Marsh notes that this could have a knock-on effect, not only affecting global trade but complicating collective progress on global challenges affecting all countries. Any slowdown in global trade, and trade rifts between the US and China, will affect major exporting countries such as Germany, Marsh said. It adds that such uncertainty “is compounded by Brexit”. “More than ever, political risks in one part of the world or sector are likely to spill over into other regions or sectors, often causing unexpected harm,” Marsh says. The risk map shows increased risk in several European countries. Brexit-related uncertainty has reduced the UK’s score by 1.7 points. While Germany’s result was 1.3 points lower based on the possibility that Angela Merkel will cut short her full term as Chancellor. However, Spain recorded the biggest deterioration of all European countries’ political risk scores. It fell by 4.2 points in the short-term political risk index. This is in direct response to the collapse of the People’s Party government in June, a new minority socialist administration and continued unrest in Catalonia. Spain now sits with Italy as the only western European countries in the mid-risk range of the country risk index. Marsh states that even without Brexit, the EU enters 2019 with parliamentary elections in May followed by new presidents of the European Commission, European Central Bank and European Council. Marsh says an early exit from Angela Markel could present the EU with “a leadership vacuum”. For now, Brexit will dominate UK politics and increases business risk as fears grow over a disruptive exit from the EU. Fitch, which provides data for the risk map, believes the UK is likely to leave the EU on “softer” terms than first envisaged, with the UK tied to a form of customs union. However, this could be temporary, with uncertainty still the most defining feature of Brexit, it says. “With the UK becoming a rule-taker and not a rule-maker in the EU, the commitment to single market and customs union membership could be overturned in subsequent years,” the Marsh report states. The political risk map also places many macro threats in the more developed economies, rather than emerging nations. “Vigilance and broad, systemic risk analysis will be vital to minimising these risks,” Marsh says. Several countries in Latin America recorded higher short-term political risk scores, following positive results from elections last year in Guatemala (+4.6), Chile (+4.2) and Paraguay (+9.8). Political unrest in Nicaragua reduced its index score by 7.0 points. This follows protest against the president’s rule last year. Africa recorded some of the most improved political risk scores for 2019, with South Africa (+6.4), South Sudan (+5.2) and Mozambique (+5.7) all up. At the other end of the scale, political risk spiked in the unstable countries of Zambia (-6.0), Mali (-6.7), Algeria (-5.0), Tunisia (-1.3), Cameroon (-6.5) and the Central African Republic (-4.0), driven by deteriorating economic and humanitarian conditions, and electoral uncertainty. The 2019 political risk map shows more than ever before the systemic nature of political risk, Marsh says, adding that politics across the G7 nations over recent times have “arguably added to the perception of an increase in political risk”. Marsh also notes that multinationals have traditionally bought political violence and terrorism insurance cover, which carry lower rates than political risk insurance and are more closely tied to property insurance. But it warns of a potential insurance gap for non-physical damage political losses. “Political risk insurance can help bridge gaps by including coverage for both perils but, more importantly, by also addressing loss of an investment or contract due to government action or inactivity where there may be no physical damage,” Marsh states.

Multinationals face new levels of political risk, warns Marsh

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