COVID-19's political risk impact: World Risk Review findings
Significant change has occurred in many countries’ economic, political, and security risks in April 2020, indicates Marsh JLT Specialty’s country risk ratings platform, World Risk Review (WRR). This likely reflects COVID-19’s global impact so far on countries, businesses, and people.
Countries’ economic and currency inconvertibility and transfer risks saw the most widespread increases, while contractual agreement repudiation risks also increased in many locations.
Sovereign credit risks are unchanged in most countries, although more change is likely. Meanwhile, the short-term risk of strikes, riots, and civil commotion decreased in many countries.
WRR scores 197 countries on a 0.1-10 scale across nine risks, with 0.1 representing the lowest risk score and 10 representing the highest. More than a quarter (26.7%) of WRR ratings increased in April 2020, compared with 10.2% in the same month in 2019. A selection of WRR ratings are summarised below.
|Many countries' economic risks increased in April 2020|
|Country Economic Risk||Currency Inconvertibility and Transfer Risk||Sovereign Credit Risk||Contractual Agreement Repudiation||Strikes, Riots, and Civil Commotion|
|Source: Marsh JLT Specialty|
In April 2020, 129 countries experienced a month-over-month increase in their WRR country economic risk rating; 42 countries saw the risk increase by 0.3 or more.
More than two thirds (69%) of Asia-Pacific countries saw their economic risk rating increase in April 2020. Both Australia’s and New Zealand’s scores rose by 0.3 to 3.1.
In Australia, the government expects the unemployment rate to double, reaching 10% in Q2 2020. In New Zealand, business confidence has fallen sharply. However, both countries have been relatively successful at containing the spread of COVID-19, raising hopes of an economic recovery.
Contractual Agreement Repudiation Risks
The investment environment is deteriorating, with contractual agreement repudiation risk scores increasing for 45 countries in April 2020. Spain and Italy saw the largest increases (1.2 and 1, respectively). Australia's score rose by 0.2 to 3.6.
The risk of expropriation and contract alterations is rising as many governments introduce emergency legislation. It is unclear how long governments will maintain an expanded role in economic activities. Scores may increase further in the medium to long term as governments look to expand revenues, particularly from natural resources, in the face of economic pressures and rising debt. The risk is likely to be particularly elevated in emerging markets dependent on commodity revenues.
Currency Inconvertibility and Transfer Risks
Currency inconvertibility and transfer risk increased for 138 countries. Financial markets are becoming more risk averse, and countries with structural economic weaknesses — such as those posting twin fiscal and current account deficits — are particularly exposed to capital movements and experiencing currency sell-offs. Emerging market currencies in Mexico, Brazil, Russia, and India are experiencing pressure. Central banks are likely to continue drawing down on foreign reserves in the coming weeks to stem declines. The recent collapse in oil prices, a result of reduced demand and the Saudi Arabia/Russia dispute, is particularly elevating currency risks among oil exporters, as access to hard currency is reduced. An OPEC+ agreement to cut oil production by 9.7 million barrels per day will come into effect on May 1, 2020, immediately de-escalating the price dispute.
However, the move is unlikely to prevent price weaknesses in the coming months.
In Asia-Pacific, Brunei faces oil price pressure. The country’s currency inconvertibility and transfer risk rating rose by 0.3 to 2.4 in April 2020. Oil accounts for most of the country’s export revenues.
Strikes, Riots, and Civil Commotion Risks
Strikes, riots, and civil commotion (SRCC) risks have seen a short-term improvement, as lockdowns limit the mass mobilization of people and reduce the threat of social unrest. Fifty-six countries saw their SRCC rating improve in April 2020. South Korea had the largest improvement in Asia-Pacific, its risk rating decreasing by 0.2 to 4.7. The improvement reflects rising approval ratings for the government, amid public support for its handling of the COVID-19 outbreak.
Protest risks may increase in the longer term, however, as governments’ handling of the pandemic faces increased scrutiny and austerity measures are introduced to tackle rising debt burdens.
COVID-19 is reshaping the risk environment. Now, more than ever, companies can benefit from a nuanced understanding of their political risk exposures. WRR allows firms with international operations to monitor rapidly evolving political risk trends, through quantitative and qualitative insights.
Sovereign Credit Risks
Sovereign credit risks saw the least change, with only 16 countries experiencing an increase. But more changes are likely. Governments across the globe are launching record stimulus packages, which will contribute to sharply widening budget deficits and significant increases in public debt levels in the coming quarters.
About World Risk Review (WRR)
WRR is Marsh JLT Specialty’s proprietary country risk ratings platform, which provides risk ratings across nine insurable perils for 197 countries. Country risk ratings are generated by a proprietary algorithm-based modelling system incorporating 277 separate indicators.
Ratings are updated monthly and provide a forecast of the risk environment in the short to medium term. For each peril, countries are scored on a 0.1-10 scale, with 0.1 representing the lowest risk score and 10 representing the highest. The nine peril indices provided by WRR mirror the insurance market’s approach to political and security risk.