A summary of the report
We have been learning, over the past few months, about the importance of COVID-19 as a factor in political risk. We now know a little more about the coronavirus itself and have some experience of the strain that it is putting on governments around the world – many of which, less than six months ago, were counting on an appreciable degree of economic growth in 2020. We are also beginning to discern the legacy of debt that the pandemic will leave behind, as and when, it finally departs. We can now be more confident that medical treatments are likely to reduce the risks from COVID-19 and that a vaccine will, at some stage, reduce the risk of contracting the disease. However, the next six to nine months will remain an extremely risky period. We now realise that transmission of the virus by people who present no symptoms is a much larger problem than initially thought. Earlier studies suggested that asymptomatic transmission accounted for 5% of cases, but the current consensus puts that number closer to 40%. Winter in the Northern Hemisphere, which will see people in close and prolonged contact in indoor settings with poor ventilationis set to increase transmission rates. Meanwhile, cases around the world are accelerating as the pandemic builds momentum amid the hasty easing or disregard of costly lockdown provisions. For emerging market (EM) countries, a category that includes many of the countries on the Index, the pandemic is proving an economic challenge as much as a health crisis. In July 2020, IMF Managing Director Kristalina Georgieva said that EM states may need more than 2.5 trillion USD in fiscal support to get through the COVID-19 crisis. Most cannot issue local-currency debt internationally and many rely on income from remittances and tourism, both of which essentially collapsed in the second quarter of 2020. Many EMs, and not just the most vulnerable, are using up their foreign reserves, and if capital flight continues, some may be only 3-6 months away from having to institute capital controls. EMs need foreign reserves to pay for essential imports, as most of their suppliers will not accept their local currency. Foreign currency is usually obtained through exporting goods and services; attracting more capital inflows than outflows, including issuing bonds globally in a foreign currency; and through aid. Each of these has been significantly affected by the global impact of the pandemic. The July 2020 meeting of G20 finance ministers disappointed many with the news that only 5.3 billion USD of bilateral debt repayments from EMs to its members are due to be suspended this year. China is a major creditor but has thus far hesitated to offer assistance. It has been struggling to secure repayment from some EMs and is cautious about lending more given the uncertaineconomic outlook. Beijing may also be worried that some EMs might calculate that a default on loans to China will not result in a loss of access to credit from Western governments, given the rising tensions between China and some Western states. EMs also lack the ability to loosen fiscal policy as aggressively as developed economies do, as they do not have deep capital markets to absorb debt issuance and remain at constant risk of internal capital flight. But a country that does not loosen fiscal policy in the current situation risks rising unemployment, falling living standards, and political instability. Some countries in the Index, including Colombia, Indonesia, the Philippines, South Africa, Thailand and Turkey have initiated quantitative easing (QE) to varying degrees, buying government bonds to bolster financial stability and liquidity. However this will raise longer-term vulnerabilities as most EM central banks have little experience of QE. To help, the main international financial institutions have announced COVID-19 packages. The World Bank is making available 160 billion USD, the Asian Development Bank 20 billion, the African Development Bank three billion, and the Inter-American Development Bank two billion USD. These packages will be crucial in the coming months but risk adding to the pandemic’s legacy of debt that will widen the gap between developed and developing economies. Africa, as so often, looks set to bear the brunt of this legacy. Figures from the IMF in July suggest that Sub-Saharan Africa's GDP could contract by 3.2% this year, double the Fund’s estimate just three months earlier, this jump resulting from the impact of domestic containment measures and a deteriorating external environment. Countries with debt sustainability issues or less-diversified economies are expected to be hit harder: tourism-dependent economies could contract by 9.7% and commodity-dependent economies by 4.2%. While the Fund still projects a return to growth in 2021, this will not be enough to return GDP back to 2019 levels in many countries. Meanwhile, real per capita GDP is expected to contract by 5.2% in 2020, returning per capita GDP to 2010 levels and pushing an estimated 26-39 million people in Sub-Saharan Africa into extreme poverty. African economies face a major economic crisis, with GDP projected to contract possibly by a larger margin than at any time in the post-colonial era. While pressures mount to find funds to stabilise the wider economy, severe downward pressures on revenues will constrict the fiscal space significantly, increasingdebt service as a percentage of government spending. Some of that pressure may be transferred to the commercial sector in the form of higher taxes and other contributions. For the oil producing countries in the Index, several of which are in Africa, the firming of global prices at around 40-45 USD per barrel is good news. The OPEC+ group, which includes Russia, agreed in July 2020 to maintain its plan to cut supply by 7.7 million barrels per day from August 2020 to December 2020 amid confidence that demand is beginning to recover and so bringing the market closer to balance. OPEC expects a strong recovery in world oil demand next year, though not to 2019 levels, as new habits such as working from home take hold. However, a sustained move above 50 USD per barrel looks unlikely in the medium term, given the modest recovery of demand and a likely revival of US shale drilling. Debt-service relief and fiscal support from multilateral organisations and G20 donors will offer some breathing room but this may not be sufficient to prevent a liquidity crisis from morphing into a debt crisis. Should this compromise access to financial markets, the post-COVID-19 economic crisis could prove much longer and deeper than current estimates.
The word we used for the previous edition of the Index was ‘unprecedented’. The country scores it contained showed a world thrown into chaos by a pandemic whose dimensions we could not yet grasp. Of the 40 countries in the Index, 36 posted rising scores, indicating increased risk, three had scores that were unchanged, and just one had a falling score that represented a decrease in risk. This edition provides some reason for encouragement, although it may simply reflect a pause after the first rush of concern over COVID-19. At best, it may reflect one step forward after two steps back, and we should expect to see the virus continuing to disrupt societies and economies around the world during the second half of 2020. Having begun with that note of caution, we can say the dark picture from last time has lightened considerably. In place of 36 countries with rising scores, in this edition we have only nine. Where we had only one country with a falling score last time (Thailand, down by a single point), in this edition we have 22. Nine countries retain the same score. It is true that almost three-quarters of the countries with falling scores are down only by one point, and so we are not seeing a convincing step back from the brink, but these numbers are at least more positive 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. In the last edition, all 40 countries posted a rising risk in one of those categories, and 39 in another. This time, what we see across the five categories is that it is much closer to the traditional mix of rising, falling, and static risk. This suggests that we are now beginning to see the outlines of individual responses to the crisis from each of the countries in the Index. As regular readers also know, each of the five categories has its own dynamics and it is extremely rare to find a country that has all of its categories moving in the same direction, with most posting a mix of rising, falling, and stable numbers. This time, however, we do have one that does, Argentina posts rising scores across all five categories for an overall score that is up by three points, the largest rise among the country scores. These dynamics within the components of the overall score tend to limit large or sudden movements once we have applied the algorithm that converts these individual category scores into a single number for each country. So , movements of country scores by one or two points in either direction actually represent a considerable degree of change. This remains the case with the current edition, where 31 countries have changed their scores but 23 have only moved up or down by one point. Other than Argentina, only Brazil has risen by more than one point, indicating the severity of the situation recorded in the previous Index. More encouragingly, six countries see their risk score decline by two points this time. Among these, Ecuador and Ukraine both benefit from a three-point fall in their expropriation scores, while Bangladesh and Indonesia have a similar three-point drop in their scores for political violence risk. The overall picture, in which countries with falling scores outnumber those with rising scores by more than two to one, is the most encouraging that we have seen for some time. Moving to the individual risk categories, the scores for expropriation risk remain relatively close to those of the two previous editions. Last time, we had 22 countries showing rising risk and 10 with a falling score. This time, we have 18 up and 13 down, halving the gap between two figures. Among rising scores, Brazil and China are both up by three points, the latter on the risks to the corporate sector posed by aspects of the new national security law for Hong Kong. Among those countries with a two-point rise for expropriation risk, Indonesia is pushing ahead with a digital services tax that hits US technology firms such as Amazon and Google particularly hard, while Kazakhstan may increase local content provisions and the Philippines has refused to renew the broadcasting license for the country’s largest media conglomerate, a company that has incurred President Duterte’s disapproval. By contrast, South Africa and Tanzania, two countries that in past editions have more often posted a rising risk, are both down by three points. Tanzania has relaxed some of the restrictions affecting the mining sector, while South Africa has delayed plans for seizing land without compensation. But the headline here belongs to Argentina, where in June, the government indicated its intent to take control of Vicentin, a failing agricultural exporter. Although the government claimed that its intention was to protect the state bank that was the company’s largest creditor, there may have been a political dimension as President Alberto Fernández looked to distract supporters of his vice president, the country’s former president Cristina Fernández de Kirchner, from concessions being made in rescheduling talks with some of the country’s bondholders. The next risk category, political violence, presented us with a new challenge for the Index last time; how to score a category that is fundamentally about assembly when so many of the countries had some form of lockdown. The previous edition saw falls in the political violence risk of 22 countries, but with a sense that the next edition might see some of those falls reversed. That has proved to be the case, with 19 countries recording a rising risk this time and just nine showing a falling risk. Russia is up by four points on the extended demonstrations in the Far Eastern province of Khabarovsk, while Ukraine is also up by four as large demonstrations against the hardline interior minister formed as soon as lockdown measures were eased. Brazil is up by three points as clashes between supporters and opponents of President Bolsonaro become more serious, while Ethiopia, Iran and Myanmar are all up by two points. Turkmenistan, which has long been a prime example of the fact that, in this category, a low score may well reflect effective state repression rather than a vibrant democracy, is also up by two points this time as independent reports emerge of small demonstrations forming to protest an increase in food shortages. In terms of falling scores for political violence, Venezuela is down by four points as pandemic concerns further dampen a waning enthusiasm for political demonstrations while, at the other end of the spectrum, China also drops by four points as the provisions of the new national security law have a chilling effect on the public protest in Hong Kong. India and Indonesia are both down by three points as lockdown restrictions reduce the prospect of religious-related violence, while Zambia and Zimbabwe are also down by three points as new restrictions on assembly stifle earlier unrest. In the terrorism category, where last time we saw countries rise and fall in equal measures and almost half the countries showed no movement, the picture is more optimistic in this edition as we find only eight countries whose risk is rising while 17 have a falling risk and 13 show no change. Among the movers in this category, Pakistan is perhaps the most notable as the terrorist attack in June on the stock exchange in Karachi by the Balochistan Liberation Army pushes its terrorism risk score to 90. Tanzania is also up by two points as a result of its worsening situation with Mozambique on its southern border. Ethiopia is also up by two as the risk of domestic terrorism increases with rising tensions in the south. More positively, among the five countries with a terrorism risk score down by three points are Russia, Saudi Arabia and Thailand, as the recent ceasefire with the National Revolutionary Front in the country’s southernmost provinces should last long enough to allow a resumption of talks. 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 was most evident in the last edition. With exchange transfer and sanctions risk, 39 of the 40 countries posted rising risks as central banks cut interest rates and currency values dropped. This time, 13 countries remain unchanged and ten have rising scores. However, 17 are posting a falling risk score, reflecting in many cases those initial moves to protect economies from the global and local impacts of the virus. It is not all positive, of course, with both Argentina and China up by three points- but ten countries are also down by two points which includes Zambia whose score drops to 70, and Ukraine down to 65, as well as Algeria, India and Kenya. The sovereign default risk category set a record in the last edition when all 40 countries saw their risk scores rise. This time, the situation is much more mixed: 15 countries have rising scores, 12 have falling scores and 13 are static. Both countries whose scores put them in the Extreme Risk category rise by a further point – Zimbabwe to 93 and Venezuela to 96. Zambia continues to edge towards this territory, up by one point to 88. Rises of two points have pushed Argentina into the High-Risk category and Turkmenistan into Medium-High. Azerbaijan and Turkey are also up by two. Ecuador’s score fell by four points following the conclusion of a provisional deal with bondholders to restructure some 17 billion USD of debt, while Angola, Ghana and Uzbekistan are all down by two points from help of international financial institutions. The DRC and Iran are both unchanged, having risen by five points last time. However, while the change from the last edition is encouraging, it is clear that a major legacy of the pandemic will be a new level of indebtedness for many of the countries in the Index. Finally, at this stage we would normally point to some of the more significant elections due in the coming months but even this remains a challenge at present. In Africa, Ethiopia has postponed its August 2020 elections without setting a new date, and Côte d’Ivoire may push back the presidential election from October 2020 due to the death of the leading candidate and because of the COVID-19 pandemic. 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 months as we work to produce a clearer picture of both the present and the future. We will continue to monitor all 40 countries in the Willis Towers Watson Political Risk Index and look forward to bringing you the next edition.