The transition toward a multipolar world order seen in 2019 — with multiple challenges to multilateralism and free trade — is expected to continue. Although the US and China have reached a “phase one” trade deal, it is unlikely to permanently resolve their trade dispute. The two countries are likely to remain strategically opposed on issues such as protection of intellectual property and state support for certain industries. Indeed, the World Economic Forum’s Global Risks Report 2020 states: “Economic confrontations between major powers is the most concerning risk for 2020.”
Sino-American rivalry is expected to deepen in 2020, particularly as the US presidential election approaches in November. The tech industry is expected to emerge as a particular battleground for the two countries, as both look to reduce technological dependence on the other. Businesses will be caught up in this rivalry, as the two countries politicize trade and investment relationships. Chinese telecoms firm Huawei embodies these challenges — the US has increased pressure on allies to not use the company’s technology — a situation that is unlikely to change in 2020. Economies globally will increasingly have to choose between US and Chinese technology partners.
Geopolitics will dominate the risk environment in the Middle East. At the time of writing, Iran and the US appear to be pursuing de-escalation following a significant flare-up in early 2020, which saw the targeted killing of an Iranian general by the US followed by ballistic missile launches against US facilities in Iraq. However, the US-Iran relationship is unlikely to improve and will generate instability in the region. Iran’s accidental shooting down of a passenger plane during the recent incidents with the US is likely to strain relations with the international community, while European governments have formally triggered a dispute mechanism in the 2015 nuclear deal, increasing pressure on its sustainability. Iran may use its asymmetric capabilities to retaliate against the US, using its proxies to carry out targeted assassinations or bombings, including cyber-attacks, across the region. Iran may also look to pressure the US’s regional allies, asserting itself in the Strait of Hormuz, where any significant disruption could impact oil supplies and thus the global economy. Iraq is likely to be the immediate focal point for US-Iranian confrontations, elevating political risk in the country. For example, one result of the January clash between the US and Iran has been increased calls within Iraq for US troops to leave the country, a move that could contribute to resurging terrorism risks in Iraq.
Elsewhere, tensions between Russia and the West are expected to continue in 2020. Russia’s increased role in the Middle East will continue through, for example, its support for the Syrian government. As the US presidential election plays out, much attention will be placed on any Russian attempts to interfere as it did in the 2016 election, straining relations further. In Europe, although the UK left the EU on January 31, its future relationship with the EU — from economic to political to security — will take years to address.
The US presidential election also looms large in 2020. The US electorate is highly polarized, with President Trump’s impeachment exacerbating divisions, despite his acquittal on February 5.
The election may also see deep fake media adding to the risks.
Economic Uncertainty
Economic and political risks will be intertwined in 2020. Trade tensions continue to present the major risk to the global economy, while the novel coronavirus (Covid-19) outbreak may also disrupt trade and supply chains. The World Bank forecasts global growth of 2.5% in 2020, a small rebound from 2019’s 2.4% estimate. Trade disputes could cost the global economy US$700 billion in lost output this year, and businesses remain pessimistic about the outlook. Of respondents to the World Economic Forum’s Global Risks Perception Survey 2019-2020, 78% expected economic confrontations to increase in 2020. Global debt levels remain a cause for concern, with debt in emerging markets reaching 170% of GDP by the end of 2018. Elevated debt levels pose notable risks to financial stability in many markets amid a more fragile global growth outlook, tendency toward fiscal and current account deficits, slowing productivity growth, and a growing preference for riskier borrowing.
At the same time, resilience to economic shocks is likely to be reduced in 2020. A move away from multilateralism and global cooperation means that governments may be unwilling to form a coordinated response to a global economic crisis, while there is reduced scope for monetary and fiscal stimulus.
Amid these headwinds, many governments face a difficult balancing act. They must address economic imbalances through structural reforms, yet doing so poses risks to social stability. In late 2019, many Latin American countries were confronted with this dilemma, exemplified by protests in Bolivia, Chile, Colombia, and Ecuador. At the core of unrest has been dissatisfaction with falling standards of living, growing levels of poverty, and prolonged periods of austerity measures. Protest risks have not been confined to Latin America — incidents also occurred in Iraq, Iran, Lebanon, France, and Hong Kong. The need to balance social and economic stability is likely to continue in 2020, elevating political risks for firms operating in a range of countries.
Managing Risk
While the Political Risk Map 2020 highlights a challenging geopolitical and economic outlook, there are pockets of significant opportunity. Emerging markets are expected to perform well in 2020, with real GDP growth of 4.3%, up from 3.9% in 2019. Markets across Sub-Saharan Africa, Asia, and beyond require investment in transport infrastructure, logistics networks, and power assets. Foreign expertise and financing can be critical in developing such assets.
However, firms looking to capitalize on such opportunities must navigate a complex and dynamic risk environment. Businesses can be exposed to political risks including currency inconvertibility, trade embargoes, seizure of assets by host governments, and political violence. Similarly, elevated levels of sovereign debt and weakened macroeconomic fundamentals elevate non-payment risks when engaging in contracts with host governments.
Political risk insurance (PRI), alongside a sophisticated understanding of the political risks facing a business, can help firms to manage their exposure and realize opportunities.
The private PRI market offers a set of credit and political risk coverages that policyholders can buy individually or together to create a bespoke insurance program. Underwriters offer tailored policy wording to cover default on loan payments, or loss of equity investment, assets, and cash flows, caused by perils including:
- Abandonment of assets due to war, terrorism, and other forms of political violence.
- Physical damage to assets due to political violence, including war, and resultant losses of business income.
- Confiscation, expropriation, nationalization, and deprivation of physical assets or equity investment.
- Forced divestiture of foreign investment on order of the investor’s home government.
- Wrongful cancellation by government of permits, licenses, or concessions.
- Contract frustration or cancellation due to default by government, or other government acts.
- Blockage of cross-border cash flows due to currency inconvertibility and non-transfer.
- Export/import restrictions, causing losses on trade transactions.
- Non-honoring of an arbitration award by a government entity (breach of contract).
- Non-payment of debt by a private entity.
Amid dynamic geopolitical conditions and economic uncertainty, insurer appetite for political risk is strong. The PRI market has developed considerable depth in recent years, and available insurance capacity has never been better.
Businesses can find potential solutions to various aspects of political risk through three related, but distinct, marketplaces.
In addition to the PRI market outlined above, firms can cover associated security and people risks through political violence and terrorism coverage, as well as kidnap and ransom insurance.
Europe
Political risk in the UK improved, following a December 2019 election that gave the Conservative Party the largest parliamentary majority in a decade, boding well for overall stability. Following the UK’s departure from the EU on January 31, focus will shift to negotiations over its future relationship with Europe.
A transition period will come to an end in December 2020, and pressure to reach a trade deal will increase throughout the year. The EU will look to offset Brexit’s financial impact by seeking increased member contributions to its budget, while the new European Commission President, Ursula von der Leyen, will seek to launch plans for a European “Green Deal” in 2020.
In Greece, the center-right New Democracy party secured a majority in the July 2019 elections, allowing it to progress with a pro-business agenda and improve the country’s fiscal position, easing relations with creditors. As a result, Fitch Solutions increased Greece’s short-term political risk index (STPRI) from 61.0 to 65.2, one of the largest improvements in Europe. A higher STPRI score represents increased political stability and is one piece of Fitch Solutions’ overall political risk index score.
In Italy, the coalition between the Democratic Party and Five Star Movement will come under strain in 2020 as the parties have diverging views on many issues. Their coalition of convenience, designed to prevent a snap election and sideline the League party, may be short-lived. The coalition will face pressure ahead of a referendum on parliamentary reform and negotiations on the future of the Ilva steelworks.