A summary of the report
In this edition of the Willis Towers Watson Political Risk Index, worsening risk temperatures dominate, compared to the roughly even split in the previous edition. In the main, the cause of the worsening temperatures is pandemic debt, an issue discussed in the overview and accompanying video for the previous edition. As we noted previously, emerging market governments with large post-pandemic debt burdens face the difficult choice of running risks from sovereign default or cutting debts aggressively and potentially provoking social unrest in the process.
In general, emerging economies have continued to recover from the pandemic (although not, in many cases, as strongly as the more heavily vaccinated countries of North America or Western Europe). Those economic recoveries, as well as rising global commodity prices, were reflected in multiple improvements on exchange transfer risk this period. These improvements include some countries from which clients have recently reported difficulties in extracting funds, such as Algeria. Countries enjoying large improvements also included Cameroon, Chad, Russia, South Africa and the UAE.
One might expect sovereign payment risks to move in the same direction, given that economic recoveries (and higher commodity prices) should herald rising tax revenues. This period, however, one of the indicators used in our political risk loss forecasting models was updated – the Fragile States Index, produced by the Fund for Peace. One sub-indicator in that Index is the level of public debt and the pandemic will leave a lasting negative legacy on that score. Countries suffering large pandemic debt-related downgrades included Argentina, Brazil, Chile, Colombia, Ecuador, Indonesia, Jordan, Malaysia, Mexico, Peru, the Philippines, Senegal, South Africa, Thailand, Tunisia, and Zambia.
It is difficult to predict how these indicators (exchange transfer and sovereign default) will evolve in the coming year. In general, economic recovery should bring more improvements. However, higher world interest rates could cause capital flight from the emerging world, leading to currency crises, and some major emerging markets have been struggling with financial issues – notably Turkey, with its unorthodox monetary policies, and to some degree China, with its challenges in the property sector (although these challenges so far appear to be contained domestically). An unexpected crisis in a large emerging market could produce contagion.
Several other countries experienced large increases in risk temperature based on the developments of recent months. Belarus faced crippling sanctions from the United States, United Kingdom and European Union, for which western firms operating in the country may experience direct or indirect retaliation. Brazil saw a downgrade on “pandemic debt” grounds (as discussed above) as well as a rising risk of policy instability in the run-up to the October 2022 presidential elections. Indonesia also saw a pandemic debt downgrade, although the country’s risk temperature in that area remains comfortably low. There is a possibility that the Indonesian government’s recent laws intended to attract investment could provoke unrest.
Nigeria’s president came to power in 2015 pledging to improve security, stamp out corruption and improve economic conditions – but has failed to deliver on all three counts, given the worsening security crisis and pandemic-related economic shocks. In Peru, the moderation of the left-leaning president has been insufficient to appease his detractors, who may force a confrontation, which along with pandemic debt has raised the risk temperature somewhat. Lastly, in Tunisia, the democratic success story of the Arab Spring has been imperilled by President Kais Saied’s announcement on July 25 that he was invoking emergency powers – although to date demonstrators appear to be giving Saied a chance to deliver on promises of change.
