Political risk set to remain elevated but companies overestimating threat level: Marsh

Political risk is likely to remain elevated for multinationals throughout this year as several key factors combine to compound problems for risk managers, concludes a new report from Marsh. But the brokers believes that the perceived level of risk is higher than the actual threat faced by companies, and argues that there are reasons for optimism and opportunities for growth at nimble firms. “While it may be unnerving, there are many opportunities for businesses and investors to grow in today’s elevated geopolitical and economic risk environment,” said Nick Robson, global head of credit specialties at Marsh Specialty. “If the risks are identified, managed, and mitigated effectively, the prospects for short-, medium-, and long-term growth frequently outweigh the risks presented by short-term volatility,” he added. Marsh’s 2023 Political Risk Report outlines major shifts and trends in the global political and economic landscape that will impact multinationals and investors in the coming year. It identifies four areas where growing risk threatens global trading security and investment environments. These risks are persistent political instability, economic retrenchment, competition for strategic resources and supply chain diversification. The report by Marsh Specialty warns that persistent political instability, especially when compounded by the impact of inflation, “threatens the economic and investment environment and, in some cases, the social fabric of emerging markets”. It says various elections could further fuel social instability and political polarisation this year. At the same time, Marsh says that economic retrenchment is becoming a dominant trend as governments worldwide focus on their self-interests in national economic security, often at the expense of free trade. This is further fragmenting international alliances, the broker warns. Meanwhile, competition for strategic resources is intensifying as a result of the Russia-Ukraine conflict and the ever-increasing demand for raw materials used in modern technologies, the report continues. Its authors say countries that hold these resources are seeing opportunities for growth, and so competition between governments in many places is contributing to geopolitical instability. The report also warns that supply chain diversification is bringing new risks as companies seek to mitigate soaring material prices, fluctuating exchange rates, increased shipping costs and government intervention. Supply chain resilience trends, including reshoring and supply chain simplification, may disrupt many economies and businesses for years to come, it says. However, despite the fact Marsh expects political risk to remain high this year, it believes there are “clear signs that the perceived level of risk exceeds actual risk levels and that at least four significant global economic growth drivers could fuel economic recovery and improve security”. Firstly it says that the backlog of core infrastructure investment stemming from the pandemic points to a rise in future activity and expansion globally. Secondly, it argues that the push to meet 2030 net-zero energy transition goals will see a range of innovative investment activity. In addition, the need to diversify supply chains to achieve greater food and energy security will continue to attract investment opportunities, it says. So too will the substantial rise in government defence spending worldwide to support allies, counter threats and accelerate the sector’s modernisation, adds Marsh.

Political risk set to remain elevated but companies overestimating threat level: Marsh

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