Welcome

by Evan Freely and Stuart Ashworth, WTW

Introduction

Autumn/Winter 2023

Welcome to the Autumn/Winter 2023 edition of the Political Risk Index, produced in collaboration with Oxford Analytica. In this edition, we also feature new research from Credendo, a European credit insurance group active in all segments of trade credit and political risk insurance. We are grateful for the opportunity to publish these important findings. As a reminder for readers the Index provides a structured analysis of political risk in 60 emerging markets of greatest interest to global investors. We have highlighted the key trends in risk levels at the end of this introduction.

As we write, the crisis in Israel is casting yet another geopolitical shaped cloud across the Middle East. Given the strategic importance of the area to global trade and energy production it is a crisis that will filter much deeper than the immediate and important humanitarian impacts. This crisis swiftly follows the ongoing conflict in Ukraine which itself was preceded by no less than a global pandemic. In an era of supreme globalisation the conveyor belt of resulting economic shocks has hit the global economy hard; especially the poorest countries who have traditionally struggled to balance the books even in more benign economic conditions. To try and make sense of the challenges, and providing context to the Index results, this edition includes several articles exploring the financing of sovereign debt, the impact for credit institutions and debtor countries, and the changing role of the IMF and World Bank.

Evan Freely

Global Head of Financial Solutions
WTW

In our introduction to the last Index, we alluded to the social and political cost of high inflation. The same caution applies to austerity measures required to manage spiralling debt, many of which are a condition of continued borrowing agreements. 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.

As a final thought I would like to return to the topic of risk management and particularly appropriate horizon scanning. We spoke in detail in the last Index about the benefits in mapping potential risks and giving thought to those risks that businesses would be prepared to cover within their own resources rather than transfer to insurance markets. But this advice is rather two dimensional and the risk environment is certainly not. 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 insurer’s price themselves out of a market.

So, which countries should be a risk management focus?

More than a decade ago, we launched the Political Risk Index to track political risk levels in major emerging markets. We use a ’risk temperature’ system to simplify the information and to highlight where countries were, relative to each other.

If a client had operations or interests in ‘red countries’ they have historically conducted a discovery exercise, understanding what insurance options are available, and at what price.

However, recent events have demonstrated that amber can quickly turn to red so, to keep on the front foot, amber-rated countries also need to be considered as do the countries that are trending upwards.

In our latest index the amber countries (based on the unfolding sovereign debt crisis), are: Argentina, Bolivia, Brazil, Ecuador, Lebanon, Libya, Montenegro, North Korea, Suriname, Venezuela.

If a company is exposed to red or amber countries, it would be a very worthwhile exercise to understand what financial losses could be sustained, and what may happen if further deterioration occurred; it would also be time well spent to explore what the cost of mitigation could be.

Thank you for taking the time to read this Political Risk Index, we hope that you find it both interesting and valuable.

Stuart Ashworth

Head of Credit Risk and Political Risk for Corporates
Head of Sales, Client Management and Innovation, Financial Solutions
WTW