A summary of the report
Since the last issue of the Willis Towers Watson Political Risk Index, the impacts of the COVID-19 coronavirus have continued to reshape global politics and economics. Over 3.2 million people have been killed by COVID-19 since December 2020, when the World Health Organisation first recorded the disease, and the number of infections has exceeded 153 million. Yet in practice these figures are likely to be far higher, given the uneven virus testing and treatment capacity globally and because many infected do not show symptoms.
As this edition of the Index goes to press, there are now several clinically approved vaccines being distributed in major world economies – although in some cases there have been temporary stoppages over blood clotting concerns. As of May 2021, over 1.37 billion people globally had received a dose of vaccine. Countries at the forefront of vaccination rates include Israel, the United States, the United Kingdom, Chile and the United Arab Emirates, all of which have 27-40% of their populations vaccinated, with 56% in Israel’s case (see chart.)
Emergence of massed vaccination programmes offers the hope of eventually returning to ‘normal’ once a critical mass of the global population has been vaccinated. However, problems and uncertainties remain. Countries have had to turn to raising additional debt on capital markets to fund the shutting down of large parts of their economies and making maintenance payments to the millions of people who have been made unemployed or who have been furloughed due to social and business lockdowns, intended to slow the spread of the virus.
Looking further ahead, some countries, particularly emerging markets (EMs), will face pressure to manage these pandemic-related debt burdens. One way of managing the increase in debt is to raise taxes and limit or delay state investment initiatives. However, that raises the risk of strangling the much-needed economic recovery and triggering social unrest. One of the economic variables that correlates most strongly with both mass protests and violent riots is ‘austerity’, i.e., cuts in government budgets or increases in taxes. Two pre-pandemic examples are the gilets jaunes movement in France, the onset of which was associated with an increase in fuel taxes, and the riots that swept Chile starting in 2019, associated with, in effect, a reduction in subsidy for public transport in Santiago.
In advanced economies, politicians have pledged to use the recovery from COVID-19 not just to strengthen economies, but to re-forge them so that they are more socially equitable and environmentally sustainable. In the United States for instance, Democrats and Republicans are discussing how to define and fund massive infrastructure investments including in public transport, something that can also provide a route to social mobility.
Many of these ‘build back better’ aspirations are the preserve of developed economies that enjoy far easier access to global capital markets and the ability to ‘print money’ Quantitative Easing (QE) than emerging markets do. As this issue of the Index shows, many EMs have had to issue bonds to help manage declines in imports and exports (and thus their reserves of foreign currencies) as COVID-19 has resulted in declines in global demand and trade. While they are not alone in doing this, EMs face a harder road ahead in meeting debt obligations.
Is there a risk of a currency and economic crisis spreading widely in the emerging markets, as happened perhaps most dramatically in 1997-2001 (which began with the East Asian financial crisis)? There are some reasons for optimism, in that the prevalence of collective action clauses should limit contagion via the behaviour of international investors. In 2020 sovereign defaults occurred in Argentina, Belize, Ecuador, Lebanon, Suriname, and Zambia, without triggering severe contagion – in part due to the widespread availability of bailout programs.
Looking at 2021 and 2022, currency and debt crisis risks are especially elevated for emerging market economies with high debt ratios, interest charges, and external financing needs, like Sri Lanka (with limited fiscal capacity), Angola, Bahrain, Egypt, Oman, and Pakistan (although these countries are supported by International Monetary Fund (IMF) programs or other sponsors), Costa Rica, El Salvador, Ghana, and Kenya. Other countries with weak balance sheets include Belarus, Tunisia, and Turkey which all have low and rapidly declining foreign exchange reserves and high external financing requirements.
COVID-19 is certain to cast a far longer economic shadow than might have been assumed when the virus first surged onto the world stage. This is true not only in itself, but also because consumer patterns are likely never fully to revert to where they were pre-pandemic. For example, many workers will choose more often or permanently to work from home, something that saves them transport costs and discretionary spending during their working days. However, this is also something which stands to reduce sales for the automotive, public transport and leisure and catering sectors, while standing also to benefit suppliers of computing solutions and providers of services and goods locally. Online retailers are also likely to retain much of their increased market share during COVID-19, which built on the rapid increase in online retailing of recent years.
Additionally, it is uncertain how long the vaccines will remain effective. This is partly because it is anticipated that ‘booster’ shots will be needed, and because, as the ongoing surge in COVID-19 infections and deaths in India during 2021 has shown, new variants of the virus can arise quickly. With that comes the risk that the vaccines currently available will need to be modified and then new massed vaccination programmes enacted. While this is medically possible, it is still a challenge to states with more limited distributive and medical capacity – in the main, the EMs. EMs will also struggle to pay for additional vaccine tranches that might be needed, absent taking on more debt or receiving more aid.
In this respect, it is more likely that the world will only slowly return to a partial or ‘new’ normal. In the meantime, various economic sectors – and their host countries – will face continuing economic uncertainty beyond the likely shifts outlined above in consumer demand patterns. There may be ‘political transitions’ associated with some of these ‘economic transitions’, especially in states dependent on a single economic sector for government finances (e.g., the so-called ‘petrostates’). Host governments will have to decide whether they wish to entertain capital controls and expropriation, perhaps to placate socio-economic concern among their populations, or whether it remains preferable to focus on encouraging inwards foreign investment.
There will also be the issue of ‘state reach’. In many of the countries that this issue of the Index covers, there are significant informal economies, informal labour and sometimes porous international boundaries. In that respect, state capacity – perhaps already comparatively limited – will not reach far enough in practice, even if ‘on paper’ vaccination and aid programmes appear to be proceeding effectively.
Not only will the recovery from COVID-19 take time as vaccines are identified, distributed and updated, but the economic recovery will also depend on governments’ success in resolving other geopolitical and economic flashpoints, including, perhaps most notably, relations between China and the West.
In this edition of the Willis Towers Watson Political Risk Index – and for the subsequent editions – we have changed the underlying dataset from which the numerical risk rating scores are developed (see the Welcome section for more details). We have also used this issue of the Index to introduce 24 new countries and territories, while retaining 36 countries from the previous report in mid-2020, for a total set of 61 countries and territories covered. This expansion will increase specific coverage of individual countries and regions, and at the same time allows for a wide regional picture to be established by readers.
In the previous edition of the Index, improvements in overall risk temperature dominated, as some countries received international aid or began to exit the worst of the pandemic. In this edition, we find ourselves in a state of limbo, with countries of rising risk and falling risk almost evenly divided, as some countries recover economically, some countries face second or third waves of infections, and in some countries the burden of managing the pandemic has over time created political or economic fragility. This limbo state applies to our own risk ratings as well: with reliable economic forecasts hard to come by during the pandemic, there is very little quarter-on-quarter change in the currency inconvertibility or sovereign default risk ratings.
The two biggest quarter-on-quarter increases in overall risk temperature occurred in Argentina and Myanmar. In Argentina, which had already suffered a sovereign default in 2020, the ongoing economic burden of the pandemic has meant that the currency has very nearly become inconvertible, and businesses may be unable to move money out of the country. In Myanmar, the aftermath of the military coup has fed both social unrest and harsh restrictions on foreign business. In mid-May 2021, one global telecoms company operating in Myanmar reported a write-down of nearly $800 million relating to the political risk situation in the country.
Looking ahead, we are particularly concerned that political violence – the Index’s second peril – will resurge as COVID-19 restrictions are lifted. One hopes that recent violence in Israel, the country with one of the world’s highest vaccination rates, is not foreshadowing. The pandemic has made it exceptionally difficult, though not impossible, for protestors to gather during 2020-21. As pandemic-related restrictions are lifted, it is likely that there will be a resurgence of protests, especially if governments are unable to handle the negative economic effects of the pandemic including higher unemployment. In Colombia, largely peaceful protests in response to a proposed tax reform highlight the difficult balancing act indebted countries will face as they seek to manage economic and political challenges simultaneously (as discussed in the previous section).
Terrorism could see similar dynamics. As lockdown measures are lifted, terrorist groups will find it easier to begin operating again, for instance being able to organise lone-wolf attacks in public without attracting security forces’ attention as readily as in a lockdown. That said, with the removal of lockdown measures, government security forces will also effectively regain capacity – since they have fewer people to police – and that capacity will be turned to combating terrorist groups. In this issue of the Index, these conflicting trends are apparent in some of the central states in Africa, such as Chad and Mali.
As lockdown measures are eased and geopolitics refocuses on issues other than COVID-19, changes to sanctions regimes can be expected, whether ‘positively’ with their removal, or ‘negatively’. Examples arising from this issue of the Index include Myanmar and China. In both cases, human rights concerns could lead to a greater use of sanctions, as the international community seeks to tip the scales to its preferred outcomes. Another example featured in this report is Iran, in that case, the US government is considering the removal of sanctions on the country, to encourage Tehran to return to the 2015 Iran nuclear deal.
