Political risk will rise next year for countries in debt crises, warns WTW

Countries carrying high levels of debt are at increased risk of social unrest amid economic fallout next year, with Jordan, Kenya and Brazil most at risk of political instability and protests because of government spending cuts, according to WTW in its latest Political Risk Index. It warns that next year also carries a heightened risk of ‘contagious protests’ spreading to multiple countries, similar to the Arab Spring. “Government spending cuts are likely to trigger protests,” WTW says. It adds that there are already signs that protests against government cuts are on the rise in low income countries and those with weak fiscal positions, with protests less frequent in Europe and the US. “The early indications are that austerity-related protests are increasing in our surveyed countries, and this is a trend that should be carefully monitored from a risk management perspective,” WTW says. The report highlights the increased risk of political instability from countries in debt following the pandemic, which has been exacerbated by high inflation and interest rates in 2023. These countries are mainly in emerging markets. The International Momentary Fund (IMF) says 36 low-income countries are at high risk of debt distress – including Ghana, Malawi, Sri Lanka, Zambia and Suriname, which have already defaulted. Some countries at risk, including Egypt and Jordan, are also likely to be severely impacted by the ongoing crisis in Israel, WTW says. The report warns that debt-distressed countries could shun traditional bailout options provided by the IMF in favour of lenders such as China. “Political challenges may make it more difficult for multilateral institutions, including the IMF and World Bank, to play their traditional crisis-management roles, which could heighten the political and economic risks associated with the crisis,” the report warns. “The politics of sovereign debt restructuring following debt crises have become increasingly complicated,” it says. Evan Freely, global head of financial solutions at WTW, explains: “A conveyor belt of economic shocks has hit the world’s most vulnerable countries hard. Emerging market governments may look for less transparent short-term financing, accepting higher interest rates in return for fewer conditions; however, this increases both humanitarian and business risks.” “Geopolitics is complicating an already difficult situation, and these trends should be carefully monitored from a risk management perspective,” he adds. WTW says businesses with operations in countries that are given an amber light in its political risk index should scan the horizon closely, with recent global events demonstrating how risk can quickly turn red. Argentina, Bolivia, Brazil, Ecuador, Lebanon, Libya, Montenegro, North Korea, Suriname and Venezuela all sit in the amber heat range in the latest update to the index. “The recent crisis in Israel and Gaza has highlighted the importance of horizon scanning regularly. For those that are not prepared, there is the possibility that insurance will not be a viable option for them, either due to the unavailability of coverage or on affordability grounds as insurers price themselves out of a market,” warns WTW. It says the latest crisis in Israel, given its strategic importance of global trade and energy production, follows on the heels of the continuing conflict in Ukraine and the pandemic. “In an era of supreme globalisation, the conveyor belt of resulting economic shocks has hit the global economy hard, especially the poorest countries that have traditionally struggled to balance the books even in more benign economic conditions,” WTW says. It further highlights the longer-term threat of climate change as an “increasingly important” driver of debt sustainability crises.

Political risk will rise next year for countries in debt crises, warns WTW

Protests and social unrest could be ‘contagious’

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