A summary of the report
This edition of the Willis Towers Watson Political Risk Index shows a worrying jump in the number of countries with a rising risk of political violence. In the introduction to the previous edition, we looked at some of the issues that produced demonstrations and protests during 2019 and noted the number that were associated with economic hardship or industrial threats to the local environment. But, when we look back on last year from the other end of this new decade, it may well be the demonstrations related to climate change that stand out for being the start of an important trend. While climate change as an economic factor is already part of the risk calculations required for many companies, the relationship between climate and political risk remains less clear. Yet, from the flooding in Africa to the fires in Australia, 2019 saw governments facing a number of unusual weather-related catastrophes that left them open to serious criticism. An inability to provide effective assistance and relief stoked popular frustration with government inadequacy in responding to climate events, magnifying other grievances. The implication for political risk is not only the prospect of greater disturbance and disruption, but also the tendency of governments under pressure to regard the private sector as a source of relief, either through additional taxation or via a populist attempt to deflect criticism onto foreign companies. This means that those working with political risk should note the failure of the annual UN climate conference, COP25, which was held in Madrid during December, to make any substantive progress. This was despite the UN Environment Programme's latest 'emissions gap' report finding that in order to meet the below-1.5-degree global warming goal, the centrepiece of the Paris Agreement reached in 2015, global emissions will have to decline by 7.6% annually. This would far outstrip any rate of decrease seen. A particular disappointment in Madrid was the inability to finalise the rules for how carbon markets will function as part of the Paris Agreement reduction pledges. The continuing deadlock is over how to transfer carbon credits from previous systems, including the initial Clean Development Mechanism; too much carryover means prices so low as to be ineffectual, while too little means that significant carbon producers will avoid the new system. Until the rules of a new global carbon market are clear, companies cannot gauge the potential returns from developing and investing in carbon crediting and offset programmes. The Madrid conference also underscored the divide between rich and poor countries on meeting the costs of climate change. Many poorer countries demanded more progress on the pledge, made by developed countries at the 2009 Copenhagen summit, to mobilise 100 billion dollars per year in climate finance. However, finding an acceptable way of tracking diverse sources of climate finance also remains a challenge. This is particularly the case for the private sector, whose pledges of assistance can often be difficult to differentiate from normal investment and business activities, leaving them open to government criticism.
There was some cause for optimism in October following the first replenishment conference for the government-supported Green Climate Fund. This was established in 2014 to provide a financial catalyst for projects that address the impact of climate change on developing countries through both mitigation and adaptation. The conference saw pledges from governments totalling ten billion dollars over the next four years, easing fears that Washington’s withdrawal from the Paris Agreement, which became effective in November, might encourage other countries to reduce their contributions. The UK, France and Germany gave the most, with Sweden and Norway the largest donors in per capita terms. As expected, the United States, Australia and Russia made no contributions this time. From an economic perspective, the climate-associated risks facing many of the governments in our Index over the longer term include the twin threats of falling GDP and rising inflation. These in turn are likely to trigger responses that could include high taxation, deficit spending, and controls on production and consumption, all of which will compound rather than alleviate the problem. Among the sectors most vulnerable to higher prices for carbon emissions is hospitality. This now accounts for more than 10% of global GDP, and tourism is a particularly important source of growth for many Index countries. But the more immediate challenge involves assisting the millions of people who have already been impacted by climate events. Africa is at the forefront here. While temperatures will rise faster in sub-Saharan Africa than in other parts of the world, it is climate variability, meaning both more intense rainfall and more intense drying, that is the key climate impact for much of the continent. The areas in East Africa that have seen flooding from the heavy rainfall since October are the ones that previously suffered drought from delayed rains during the March–May rainy period, highlighting the vulnerability of countries where high dependence on local agriculture make food security a serious political issue. Drought and crop failure in southern Africa, which has experienced 'normal' rainfall just once in the last five growing seasons, has led the World Food Programme projections showing that some 45 million people face 'severe' food insecurity during 2020. Three-quarters of African countries are also vulnerable to widening desertification, which will further reduce crop and livestock yields. With the desperate need for electricity to aid development, there are efforts to move towards renewables. West Africa's first utility-scale wind farm began sending power to Senegal's grid in December, while Kenya officially opened the continent's largest wind farm in July. Countries announcing new tree-planting pledges at September's UN Climate Action Summit included Ethiopia (4 billion), Kenya (2 billion) and Nigeria (25 million). Yet with most financing for new power stations coming from China, which favours coal as a fuel, government efforts to be green can be quickly overtaken by practicalities. African countries were at the forefront of a concerted push for greater disaster recovery financing at the Madrid summit in December, but reached little consensus on the issue with developed countries. During 2020, the UN will encourage all countries to set more ambitious targets for reducing domestic emissions, but the fundamental outlook for multilateral action looks bleak unless public pressure can bring about policy changes in major countries such as the United States, Brazil and India. The outlook is for continuing instances of extreme weather and climate variance to stretch the capacity of governments still further, making the corporate sector one of the first places they turn for resources.
As we move into a new decade, 2020 starts with plenty of reasons for concern as the Political Risk Index continues to show an overall rise in political risk across the 40 countries that we cover. In the current edition of the Index, 21 countries have their overall scores rising while only 11 are falling, with just eight having scores that did not move. The gap between the number of rising and falling scores has now risen to ten from just three in the last edition, with those rising scores evident across northern and southern Africa, Latin America and the Asia-Pacific region.
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. It is also worth noting here that it is 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. In this edition, no country managed to have all five categories moving in unison, although Algeria, Colombia, Ecuador and South Africa each came close to a full house of rising risks, while Venezuela was the only one to come close to five falling scores. These internal dynamics within the overall score 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. A headline overview of the country scores in this edition would note that Venezuela, falling by four points to a score of 86, has finally moved out of the extreme category to be merely very high risk as the exhaustion of all sides sees an unhappy stasis set in. Its scores for exchange and sovereign default risks remain above 90, however. There are no other countries with scores above 80 now that Zimbabwe is down two points to 79, although this decrease feels more temporary than permanent. Of the three other countries with scores in the 70s, Zambia remains the most worrying at 76, up two points on rising scores for expropriation, political violence and exchange transfer risk. Argentina, Colombia, the DRC, Indonesia and Mexico all have scores in the mid-60s, and each posted a rising score this time. On the positive side, four other countries beside Venezuela have falling scores in this edition largely as a result of lower expropriation numbers, although Tanzania’s score of 78 is still high and leaves it only one point behind Indonesia, the category leader. Gabon has been helped by the improving health of its president, which has lowered the risk of political violence, while Egypt and Ukraine have benefited from a stronger economic outlook. Saudi Arabia, Turkey and Vietnam are now posting lower scores having risen last time. If we turn to the first of the five individual risk categories that make up each country’s overall score, the numbers for expropriation risk reflect the widening gap between countries with rising and falling risk. Last time, that gap was just one, with 16 countries up and 15 down. This time, the gap is five as 19 countries see their scores rise and 14 fall. Algeria has the largest rise, with its score up by five points as the opposition movement denounces the end of the 49% limit on foreign ownership outside the hydrocarbons sector and more businesses are caught up in the effects of a zealous anti-corruption drive. Ecuador and Nigeria are both up by four, the former on the government’s weak response to renewed vigour among mining opponents and the latter on a sudden closing of its borders to trade. Argentina and Côte d’Ivoire rise by three points, with Brazil, Colombia, the Philippines and Zambia among those up by two. In terms of lower expropriation scores, Venezuela remains in a class of its own. It falls by six points for the second consecutive edition as the Maduro administration actively turns from years of politically motivated expropriation to seeking investment throughout the economy and is openly discussing privatisation of the electricity sector. Zimbabwe’s score also continues to fall as the government pulls back from its indigenisation policy, although this change of direction is now encountering growing resistance from within the ruling ZPF. Honourable mentions go to India, Iran and Kenya, all of which are down by two points. It is the next category, political violence, that shows the most difference between the previous edition and the current one. Last time, there were 15 countries with rising scores, 13 with falling scores and 12 unchanged. In the current edition, we have 26 countries with rising scores and only nine falling, leaving an extraordinary gap of 17 between them. Another unusual aspect is that three countries each post a rise of six points. Colombia, Ecuador and Iran all saw a new level of protests against the government’s handling of the economy, with a heavy-handed response from the security services making the situation worse in each case. Indonesia and India were close behind, although with protests related to corruption and immigration rather than economic conditions. Algeria, Ethiopia and Zambia are all up by three points on continuing unrest that was evident for most of 2019, while Egypt, Mexico and Thailand are among those rising by two. On the encouraging side, although only nine countries post lower scores for political violence in this edition, they are all down by two points or more. Venezuela leads the way, falling from 90 to 85, while Gabon and Zimbabwe are down by three points. Among those falling by two is Senegal, where tensions have eased following the release of the capital’s mayor from detention, but Kazakhstan, Russia and Vietnam are down primarily on further security clampdowns. In contrast to political violence, the terrorism risk category shows some similarity between the previous edition and the present one, although even here there is an important twist. Last time, we saw a gap of three between the eight countries rising and the 11 that were falling. This time, the gap is down to two but the direction of travel is reversed, so that more countries see their risk rising (11) than falling (9). Indonesia’s rise of four points is the result of two attacks late in 2019 that have been linked to the Islamist JAD. Tanzania is up two on a cross-border attack from Mozambique, while Thailand is also up two on new attacks against security forces in its restive southern provinces. More positively, six countries have fallen by two points or more. As was the case last time, almost half of the 40 countries showed no change in terrorism risk, and 11 of those scored only 35 or less. For more than a quarter of our countries, terrorism remains a relatively insignificant risk. The gap between rising and falling countries is also narrow in the category that covers risks associated with exchange transfers and trade sanctions. Here, 14 countries have a higher risk score in this edition, while 12 have a lower one, a gap of two compared with just one last time, when it was a case of 16 up and 15 down. In the current edition, Algeria is up three points on likely policy differences between the central bank and the new government in areas such as capital controls, while Myanmar is also up by three on the increased likelihood of sanctions linked to the human rights case against the government at the International Criminal Court. Iran is up by a further two points as new US sanctions affect more of the economy, while Thailand is also up two as Washington targets its seafood sector for unsafe labour conditions. On the positive side, Ukraine is down by three as its currency avoided what has become a usual autumn slump, and Mexico is down two points as a stable peso and falling inflation have allowed the central bank to make an effective series of interest rate cuts. Other countries down by two points include Bangladesh and Egypt.
In the last category, which covers sovereign default risk, the gap between those countries with a rising risk (18) and those with a falling risk (9) widens significantly again to nine in this edition, as compared to just two last time. There is no single headline story to rival Argentina’s seven-point rise in the last edition, but instead we have ten countries rising by two points each as a rising debt-to-GDP ratio, dwindling reserves, or both, raise the risk of sovereign non-payment. In some cases, notably Kenya, Nigeria and the Philippines, high levels of public spending that are meant to stimulate growth are adding to debt concerns. The falling scores here tend to be mostly by a single point, although Brazil is down by two now that pension reform is in place.
Finally, after a year in which two of the world’s largest democracies, India and Indonesia, went to the polls, Ukraine and Argentina saw incumbent presidents defeated, and local elections in Hong Kong came to symbolise so much more than a council seat, 2020 will see another round of important contests. Countries in the Index with a significant election at some point during the year include Côte d’Ivoire, Egypt, Ethiopia, Ghana, Myanmar, Peru, Tanzania and Venezuela. In the coming weeks, we will continue to monitor the factors that affect political risk in these countries, as well as all the others in the Willis Towers Watson Political Risk Index, and we look forward to bringing you the next edition.