A summary of the report
Shakespeare’s image in Hamlet of sorrows coming not as single spies but in battalions seems to fit the times all too well. Most of the 40 countries in the Willis Towers Watson Political Risk Index are facing the economic and social disruption of the COVID-19 pandemic and the political implications of measures taken to limit its spread, together with falling government revenues and a fragile currency. In many cases, the need for spending public money now is pushing up levels of debt that are already draining the economy. Close to half of the Index countries are oil producers, for whom the virus-related global slowdown has resulted in a drastically reduced oil price that is cutting deeply into expected revenues. The longer-term impacts for each country on the relationship between the public and private sectors, on existing tensions in the political system, on growth and currencies, and on sovereign debt, will be profound. While the policy response to the pandemic in many developed countries has involved locking down the whole population and using stimulus packages to minimise bankruptcies and protect jobs, this is not always an option for countries in the Index. Instead, many face the danger of a vicious circle in which an inability to enforce or finance social distancing requirements to slow the spread of the virus results in a collapse of underfunded health systems and new levels of social discontent that strain the political system. According to ILO estimates in 2018, the share of jobs in the informal sector was roughly 85% in Africa and 40% in Latin America; most of these workers live day to day and have limited savings. Moreover, the informal sector is the main means of providing food for millions of households in large urban centres. If disrupted, either because workers stay away or informal operations are temporarily closed, the result will be reduced food supplies and higher prices just as incomes drop. Commodity prices fell by 37% year-on-year in the first quarter of 2020, according to UNCTAD, with energy prices down 55%, cotton dropping by 23% and copper by 21%. Most other sources of foreign exchange have also suffered. Revenue from tourism will take at least a year to recuperate, and probably much longer, while remittances are dropping sharply as migrant workers become the first to be hit by unemployment in developed economies. Most developing countries have witnessed currency devaluations in the range of 10-25% this year as exports decrease and investors flee, significantly increasing their foreign currency denominated debt burden. This is also likely to fuel inflation, making monetary easing more difficult. Given these constraints, a country's ability to respond effectively to COVID-19 will often depend on support from multilateral organisations or developed economies. But such assistance usually comes with strings attached, primarily a requirement to cut back on public spending. In dealing with the impact of a pandemic, however, such restraint will be difficult to explain to a hard-hit populous and could jeopardise political stability in the name of fiscal orthodoxy.
In April 2020, the G20 agreed to suspend debt service payments for eligible low-income countries until the end of 2020. The package applies to low-income countries on IMF support who agree to disclose all public debt, contract no new non-concessional debt, and use the resulting fiscal space to increase COVID-19 spending. The suspension covers principal payments and interest, but does not cancel obligations, which must be repaid over three years following the year's grace period. As such, while welcome, it defers rather than resolves the debt issues that so many countries now face. The IMF announced a debt relief programme for 25 of the world’s poorest countries in April, but the DRC was the only country on the Index to make that list. Most Index countries are better positioned but are still looking at challenges that none could have anticipated just a few months ago. In this respect, Kazakhstan’s experience can stand for many of the countries in the Index. The COVID-19 pandemic and plummeting global oil prices saw its currency, the tenge, fall by almost 15% in March 2020, and the government has put fiscal consolidation plans on hold as it allocates 10 billion USD to fight the spread of the virus and respond to its economic impact. Quarantine measures were implemented in mid-March 2020, followed by a strict national lockdown at the end of the month.
By the start of April 2020, the GDP forecast had been revised downward from 3.8% at the start of the year to a contraction of at least 1%. The central bank was abandoning its inflation-targeting efforts despite expectations of a return to an inflation rate in double figures in order to align its policies with government attempts to stave off recession. A budget deficit that is now expected to exceed 3.5% will be covered as far as possible by running down the sovereign wealth fund. VAT has been lowered on food and payment times for other taxes extended, with subsidised loans available for small and medium-sized businesses.
All this provides a test for the country’s new president, in office for barely a year and with his long-time predecessor, Nursultan Nazarbayev, still very much a political presence. One of the most important challenges facing the government once it begins to relax its lockdown measures will be the restoration and creation of employment. In the meantime, it is calling up army reservists to soak up some of the excess labour. There are some relative bright spots, not least the fact that efforts to diversify the economy away from hydrocarbons are making some progress, with last year’s growth of 4.5% being broader-based and less dependent on oil sector output than in 2017 or 2018. There was also a rise of 5% in real disposable incomes last year that boosted household demand. But the setbacks of recent weeks for a country whose economy was beginning to show signs of strengthening is disheartening at best. The next edition of the Index may be better placed to capture and assess the impact of the virus on the countries we monitor; for now, in a sense, we have seen the lightning but await the thunder. But both the virus and its impact will be with us for some time to come.
We would normally start this section by comparing the overall results from this edition of the Index with those from the previous one. When we did this last time, we saw that 21 countries had their overall scores rising while only 11 were falling, with just eight having scores that did not move. We noted that the gap between the number of rising and falling scores had risen to ten from just three in the preceding edition, suggesting a worrying trend of rising risk. And that is not all. As long-time readers will know, the overall score for each country is derived from the ratings for five individual risk categories: expropriation, political violence, terrorism, exchange transfer and trade sanctions, and sovereign default. For the first time ever, one of those categories shows all 40 countries with rising risk. A second category has 39 countries with rising risk – and when Zimbabwe is the only country to post a falling score, something extraordinary is clearly happening. The interrelated factors of COVID-19, collapsing oil prices, negative growth and rising debt have created a new world and our numbers reflect that. Hidden within the figures is the silhouette of a new landscape for political risk, as for so much else. Yet one aspect of the Index has held true among all this. Each of the five categories has its own dynamics and it is extremely rare to find a country that has all of its sub-categories moving in the same direction, with most posting a mix of rising, falling, and stable numbers. Even amid the current chaos, we do not have a single country posting rising scores across all five categories. Brazil, China, India and South Africa all come close, underlining how challenging this period is for the BRICS countries, but no country has all five categories moving in unison. These internal dynamics within the components of the overall score also tend to reduce the instances of large or sudden movements once we have applied the algorithm that converts these individual category scores into a single number for each country. As a result, movements of country scores by one or two points in either direction may appear small but represent a considerable degree of change. This remains the case with the current edition. Most country scores move up, indicating increasing risk, by a single point; only two, China and Mexico, are up by as much as three points.
Moving to the individual risk categories, expropriation remains, perhaps surprisingly, relatively close to the previous edition. That had 19 countries with rising risk and 14 with a falling score. This time, we have 22 up and only ten down, so that the gap between those two figures is more than twice what it was last time. There are a few relatively high scores here this time. Mexico grabs the headline with a rise of six points as the president’s insistence on “public consultations” ends another major investment project when already two-thirds complete. This degree of presidential intervention now risks becoming a trend and having a serious impact on foreign investment. Russia is up by four points following the adoption of a constitutional provision that places Russian law above international laws and agreements, so enabling the government to disregard any rules by tribunals or other bodies.
This includes damages awarded against the state in expropriation cases. Nigeria is also up by four points as the government makes changes to draft legislation for the petroleum sector, reopening a period of uncertainty that appeared to be ending after almost a decade. In addition, Algeria, on disruption in the oil sector, Colombia, on state moves to regulate pharma prices, and the Philippines, on threats to re-nationalise utilities, are all up by three points. Among countries with falling scores are the DRC, where the government now appears more inclined to work with the mining sector rather than against it, Pakistan, where efforts to meet IMF conditions were underway before the virus struck, and Thailand, where the government is stepping up efforts to attract investment. The next risk category, political violence, presented us with a new challenge for the Index – how to score a category that is fundamentally about assembly when so many of the countries covered have some form of lockdown. Several factors came into play here. One was the legal limitations on gatherings, and the extent to which it was being enforced. This resembled an aspect of the category with which we are already familiar – a low political risk score that is the result of effective repression rather than vibrant democracy. But it was also clear that government efforts to limit the spread of COVID-19 have been hugely disruptive in economies dominated by daily wage earners, building up resentment which has the potential to spill over into anti-government action. And there are also many countries in the Index where issues such as labour reforms, ethnic clashes, or upcoming elections had created existing tensions that are ready to resume as soon as an easing of lockdown rules begins. Finally, as the period covered by this edition of the Index came to an end, we saw the first wave of protests in China that followed the easing of restrictions within and around Wuhan. The lesson from this very early evidence seems to be that, once the ability to gather in public returns, people will be tempted to take advantage of it to protest about the economic costs of the lockdown. Taking these factors together, we have assumed that virus-related restrictions will reduce the immediate risk of political violence but at the possible cost of a greater risk once we get to the next stage of the virus crisis. As a result, this edition of the Index sees modest falls in 22 countries, compared to just nine last time, but with a sense that the next edition may see those falls reversed in many cases. Some countries have posted higher political scores, including China where the experience in Wuhan has been accompanied by instances of strikes and protests at smaller companies that have not been able to retain their workforce or pay wages that are still owed. India may see further religious-based conflict and Kazakhstan has experienced some ethnic clashes, while Senegal and South Africa are both up by two points. In the terrorism category, the picture is more mixed. With ten countries showing a rising risk, 11 with a falling risk, and almost half not moving, it is also the closest of the categories to the scores from last time. Several countries post a rise of three points in the new edition. These include Ecuador, where narcotics gangs are developing terror tactics, Ghana, where the elevated terrorist threat in neighbouring countries is raising risk, and Venezuela. More positively, there are also some notable falling scores. These include a drop of five points for Thailand after the main terrorist group in the south of the country declared a virus-related unilateral ceasefire, and Algeria, where the security services continue to forestall terrorist infiltration from neighbouring Libya despite Algeria’s continuing political turmoil. The final two categories, the first concerned with exchange transfer and sanctions risk and the second covering sovereign default risk, are where the impact of the COVID-19 outbreak becomes most evident. With exchange transfer and sanctions risk, 39 of our 40 countries post rising risks. The economic aspects that make up this category have been hard hit as central banks cut interest rates and reserve requirements in hopes of softening the impact of the virus, while many currencies have been dropping in value. The has been little easing of sanctions, and a definite hardening of existing restrictions in some cases. For half the countries in the Index, the risk in this category has risen by two points. In a handful of cases, the rise has been four points. These include Brazil, where the real lost 20% of its value during the first quarter, and Nigeria, which quietly devalued its official exchange rate by almost as much in March 2020. The only country to buck this trend is Zimbabwe, where the central bank has abandoned the unsuccessful experiment with unpegging the currency from the US dollar and reintroduced a multi-currency regime that repegged the local Zimbabwe dollar at 25 USD. For sovereign default risk, however, Zimbabwe joins all the other countries in a clean sweep of rising risk across the whole of the Index. In this category, which deals with a country’s capacity to meet its financial commitments, more than half of the 40 countries in the Index post a rise of three points or more. Among the notable rises are the DRC, up five points on suggestions that the government may choose to default on concessionary loans and deploy its limited funds for stimulus measures rather than repayments, and Iran, where a lack of access to the IMF is seeing its National Development Fund being drawn down heavily. Among those rising by four points are South Africa, where debt servicing costs are now absorbing 15% of all tax revenue, and Brazil, where the debt-to-GDP ratio hit 80% late last year.
All the countries in the Index are facing sudden and unprecedented demands for expenditure to meet the challenge of COVID-19. Those that have oil as a primary export have their problems compounded. The impact on debt is impossible to calculate at this stage beyond saying that it will be substantial. The World Bank and IMF are working on debt relief programmes that may well make a difference, but the outlook at the moment is for rising indebtedness combined with falling productivity. The figures from the next edition may be able to capture the situation more exactly, but they are unlikely to be much more encouraging as governments ramp up spending to help populations that face virus-related distress.
Finally, at this stage we would normally point to some of the more significant elections due in the coming months but even this is a challenge at present. In Africa, Ethiopia has already postponed the general elections due in August 2020, and Côte d’Ivoire may do the same thing. Nigeria, Ghana, and Tanzania all have elections that are due at the end of 2020 but now have their timing in question while, further afield, Myanmar and Venezuela are in a similar position. All this means that there is much to monitor in the coming weeks and months in the hope of producing a clear picture of both the present and the future. We look forward to bringing you the next edition of the Willis Towers Watson Political Risk Index.