Political Risk Map 2021: Mid-Year Update

A two-track pandemic is leading to a multi speed recovery

• Introduction
• Inequity: Concerns beyond a vaccine
• The factors igniting social unrest
• Africa's exposure to economic downturn
• Balancing the need for commodity revenues with green transition
• Managing political and credit risks

Introduction

From naval tensions in the South China Sea and resurgent unrest in Tunisia, to protests in Chile and port closures across South America, countries and regions are now facing waves of discontent. Uneven vaccine rollouts, new coronavirus variants, plus political transitions leading to a lack of policy continuity have upended even the most robust of plans. 

While the global economy is starting to recover, economic and political conditions continue to weigh heavily on the ability of many individual countries to meet their citizens’ needs and expectations. Marsh Specialty’s political risk ratings show that only nine countries’ economic risk scores have worsened in the last 12 months, out of the 197 jurisdictions analyzed. But at the same time, almost 60% of countries worldwide saw a deterioration of their governments’ sovereign debt profiles, and more than 50% presented a higher risk of internal violence this year, compared with mid-2020, when lockdown measures widely ceased. 

A two-track pandemic is leading to a multi speed recovery, as the divide between the global rich and poor influences vaccination rates. Vaccine inequity has become a prominent issue due to a combination of factors — primarily driven by a global shortage of raw materials and limited production capacities, especially in developing countries. Financing is also a factor to be considered, as few developing countries can afford the vaccines, especially if there are challenges in providing crucial basic services such as clean water. 

As pointed out in Marsh Specialty’s Political Risk Map 2021, released in April, growth inequality between rich and poor nations — typically the “jabs” and the “jab-nots” — is widening. The growing divide will likely add social and political tension to many countries’ deteriorating economic prospects.

Countries with higher rates of vaccinated populations have higher growth potential.

Countries and regions above the trend line in the chart above are proving more effective in vaccination rollout — the “jabs” markets. The main reasons include the development of proprietary vaccines by locally-based companies, the ability to rapidly obtain more doses, greater distribution efficiency, and government policies to encourage mass inoculation. The economic outlooks for these countries will likely be reinforced in the next months as vaccine distribution can be also regarded as a proxy for policy effectiveness on the recovery side. Countries below the trend line typically include the emerging market universe, which have seen limited access to costly vaccines, a relatively higher pressure on institutions and social systems. In these countries, the “jab-nots”, economic growth and overall resilience are still driven by long-term factors such as demographics, commodity-related revenues and, possibly, from some base effect of 2020 (for example, Argentina, Mexico, and India saw worse-than-expected recessions last year). Although there currently seems to be a correlation between positive economic outlook and successful vaccine roll-out programs, it is a trend to be closely watched, as political risk events that may occur in both “jabs” and “jab-nots” would have an impact on economic performance.

For countries that are lagging, notably many in Africa, social and political unrest remains a probable outcome. Pre-existing social tensions, exacerbated by the pandemic, have increased difficulties in governance, and have constrained the fiscal room to manoeuvre for African countries to appease their disenchanted publics. As the gap widens, factors such as food security, water access, and a declining contribution from the informal economy, will only increase the level of economic and political risks. 

Meanwhile, commodity prices have been driven up, principally by infrastructure spending and national recovery stimulus plans. In recent times, governments have been consolidating their hold on strategic resources as a means to raise revenue and redirect their spending to newly urgent priorities such as damaged health and labour systems. For example, in Chile, the Congress is examining several opposition-led bills potentially affecting the mining sector, where some key agreements due to expire in 2023 will likely be reviewed by the next government. The debate on royalties has fuelled political risk in the world's top mining producing region, with higher taxes for miners proposed in both Chile and Peru. Latin American countries’ economic profiles are also exposed to environmental risks combined with a relatively low level of development focused on reducing potential impact of natural disasters related to climate change.

Across all countries, the immediate consequences of the pandemic are still unfolding and may have long-term implications. In the Political Risk Map 2021: Mid-Year Update, we’ll explore further these foregoing themes — global vaccination inequity; increasing social unrest and political tension; Africa’s growing economic exposure; and the challenges that the commodities sector is currently facing globally. 

Chapter 1

Inequity: Concerns beyond a vaccine

Vaccine production by the end of the year could reach more than 11 billion doses. Assuming a two-dose regime, this would be enough to vaccinate 70% of the world’s population, which is anticipated as an approximate indicator for achieving global herd immunity. Global production capacity for 22-23 billion doses of vaccines, already approved for use, appears to be in hand.

Vaccines approved for use could exceed 22 billion doses in 2022.

However, the problem lies with the inequity of distribution. G7 countries have succeeded in administering at least one dose to more than 50% of their populations, and are on course to have that figure increase to over 70% before the close of the year. But developing economies are struggling to vaccinate, evident in the many African countries that are yet to administer at least one dose to 1% of the population.

This divide has been driven by the ability of high-income countries to procure a higher portion of vaccines. These countries have procured more than six billion doses, approximately two-thirds of the total global procurement, despite constituting only 16% of the world’s population. 

The price of vaccines tends to differ by supplier, the type of vaccine produced, and bilateral deals; the difference in price point may serve to exacerbate economic pressures for developing countries, such as South Africa and Indonesia. Economic trouble proliferating throughout any developing economies is the foundation for civil unrest at a national level, evermore so during a global pandemic.

The pandemic-induced recession has profoundly afflicted emerging markets across the world, with significant changes in the economic, investment, and security environments. The inequity resulting from these pressures provoked an economic contraction of around 1% in South Korea, 7% in both India and South Africa, and 8% in Mexico in 2020. The anticipated stresses on India, South Africa and Indonesia can be primarily linked to three factors:

• An increase in the number of corporate bankruptcies, which compounds existing strains on average household incomes and banks alike. With this coming to fruition against a backdrop of relatively weak frameworks for social security in these countries, the scope for millions of people to fall into poverty remains acute.
• The preexisting low capital investment trends for these countries, further undermined by capital flows dipping below pre-pandemic levels, and more crucially, below the average for all emerging markets.
• As measures to support borrowers, such as forbearances, are withdrawn, banks' asset quality is likely to deteriorate, while the state’s capability to provide much-needed support to the banking sector may be compromised. The increasing number of non-performing loans and the return of inflationary pressures could restrict credit expansion, which would weigh on investment spending.

The political turmoil in countries possessing advantageous demographics is likely to remain in the short-term, meaning that governments may be pressured to divert funds that could otherwise balance against these economic pressures, to mitigate against the discontent of younger populations. One example of this trend is the civil unrest in South Africa, where the lack of fiscal spending by the government has negatively impacted job creation and the housing sectors. The unrest also came about as a result of a perceived ineffective governmental economic response to the pandemic. Another example is the student uprisings in Indonesia – the reliance of the Indonesia government on China to deal with the delta variant of the coronavirus has increased youth disenchantment, especially because of the alleged mistreatment of the Uyghur community in China.

Chapter 2

The factors igniting social unrest

Preexisting tensions have been exacerbated by the pandemic, creating difficulties in governance, and limiting space for fiscal maneuvering. As the gap between rich and poor widens between nations, factors such as food insecurity, issues around water access, and the impact of lockdown measures in the economic activity of informal sectors are increasing economic and political risks between and within nations. These pressures raise the question of whether strikes, riots, and other types of civil disturbances are likely to emerge in previously unaffected territories.

According to the World Bank, Colombia has the second highest income inequality among the South American region’s large countries. With strong economic, ethnic, and geographic barriers to a high level education and the formal job market, Colombia’s social mobility is also the lowest within the Organization for Economic Cooperation and Development (OECD). The lack of redistribution of wealth and opportunity has led to social unrest and the entrenchment of grassroots demands.

On the other side of the Pacific Ocean, large economies in Southeast Asia are hardly regarded as centers of politically motivated disturbance. Nevertheless, military developments in the South China Sea, and tensions between Beijing and Washington, are leading countries located in proximity to strategic bottlenecks to position themselves within the geopolitical arena, with effects on local public opinion.

 Chapter 3

Africa’s exposure to economic downturn

As of August 2021, only 1.7% of Africa’s adult population had been fully vaccinated against COVID-19. The global economy is expected to grow by 6% in 2021, but the continent’s economic growth is expected to be only half of that, at 3.2%.

Interest payments reached 20% of tax revenue for the region as a whole in 2020. This has impacted debt sustainability, signaling that debt relief initiatives could ultimately lead to an increase in financial sector exposure and contingent liabilities, exacerbating macroeconomic vulnerabilities in some countries. Similarly, public debt in North Africa rose by about 12 percentage points to an average of 88% of GDP, leaving limited space for energy and environmental transition investment.

In Tunisia, the government’s management of the pandemic (which has been seen by many as ineffective), as well as the need to introduce austerity measures during negotiations with the International Monetary Fund (IMF), left little room to prevent a new wave of nationwide protests in 2021. Long-awaited structural reforms are unlikely to be implemented fully in 2022, extending endemic social and economic problems. On the other hand, Abdul Fattah al-Sisi’s firm leadership in Egypt seems capable of averting a new wave of protests, avoiding a repetition of the Arab Spring a decade ago, when protests from Tunisia spread throughout North Africa and the Near East.

In South Africa, high poverty and unemployment rates have fueled unrest. Protests began in July, in support of former President Jacob Zuma, with hundreds of vehicles burned and widespread looting. The rioting began in his political heartland of KwaZulu-Natal but has since spread to Gauteng, the country’s commercial hub, halting economic activity.

Nonpayment, financial, and operational risks are rising in the region, cooling down economic prospects. The long-term effects of these events may ultimately narrow opportunities for younger generations throughout the region, with a few notable exceptions, such as Botswana, Gabon, Morocco, and Zimbabwe. 

Chapter 4

Balancing the need for commodity revenues with green transition

Infrastructure spending and national recovery plans are constraining commodity availability and driving prices up, with several governments tightening their hold on strategic resources to rebalance broken health and labor systems.

Today, 2.6 billion people experience high or extreme water stress — by 2040, this number will increase to 5.4 billion. If natural disasters occur at the same rate seen in the last few decades, 1.2 billion people could be displaced globally by 2050. Between March and May of this year, at least 9.2 million people in Nigeria faced a crisis, or increased levels of food insecurity, amid armed conflicts, the effects of the pandemic, and climate change.

In Latin America, several countries are addressing natural resources in opposing ways. In Mexico, the government awarded control of one of the country’s biggest oil discoveries to state-owned Pemex after months of deliberation, dealing a blow to private investment and raising the prospect of international litigation. In July, however, an arbitral decision was made against the government over state intervention on a privately-operated dam basin — which can likely lead to swifter contract renewal negotiations between the government and private investors, without the need for arbitration.

In Ecuador, President Guillermo Lasso issued a decree in July that aims to double the country’s oil production over the next five years, via the implementation of policies designed to increase foreign investment, the reinstatement of production sharing agreements, and new bidding processes for underdeveloped oil blocks, including those in the Amazon. However, the acceleration of the decree may encounter obstacles. President Lasso’s decision to bypass national assembly approval sets a precedent for unpopular policy goals, which could increase public discontent. Moreover, in January 2021, three large European banks announced that they would no longer finance the trade of oil originating in the Ecuadorean Amazon, highlighting the reputational risk attached to these initiatives.

Chile is also experiencing a new cycle of protests over concerns that include several environmental issues, and business continuity for the country’s vital mining sector. The outcome of the constituent process would reveal how far Chile is willing to go to protect its environment and redistribute wealth.

In Peru, several members of the government have stated that mining royalties could be increased, in order to maintain robust public account metrics in the face of the pandemic-induced economic crisis and necessary stimulus measures. The Peruvian government retains the second-strongest credit rating in the region, according to main agencies, despite recent concerns.

Chapter 5

Managing political and credit risks

Across all countries, the immediate consequences of the pandemic are still unfolding and may have long-term implications. Prior to this, some political and economic risks were almost unconceivable to exporting companies, investors, and risk managers.

Insurance-backed political risk and credit solutions can help to secure trade and investment capital, protect balance sheets, and enable growth that will fuel and sustain the recovery from COVID-19.

The potential benefits of political risk, credit insurance, and surety solutions include:

Supply chain resilience. Trade credit coverage can strengthen global supply chains, helping key suppliers through improved payment terms.

Optimization of working capital and improvement of key financial ratios. Trade credit insurance can support accounts receivable purchase programs, improving liquidity in difficult economic times.

Collateral replacement for corporate clients. Commercial and bank surety can replace cash and/or letters of credit used as collateral, releasing capacity to fund growth

Bank portfolio risk distribution. Political risk and trade credit solutions can assist many international banks in managing their portfolio risks, and avoid concentrations of risk in certain classes and countries.

Safety belts for investment. Political risk insurance can secure infrastructure and other direct investments in volatile emerging markets, while facilitating bank lending even when sovereign credit is downgraded.

Facilitation of long-term capital raising. Political risk and credit insurance can serve as a bridge to future financing by enabling projects to go forward and their investors to realize their objectives. Establishing a track record of delivering value while mitigating risk can enable project owners to access additional capital for sustainable growth.

Mitigation of contract repudiation. Political risk insurance can provide protection on contracts for the supply of goods or services for companies negotiating with government or private entities in emerging countries that are often exposed to a number of underlying political risks.

A variety of tools exist to manage political and credit risk, from both public and private sources. In addition to government-backed export credit agencies and multilateral organizations, a robust private political risk insurance market has developed to help investors and businesses weather political and economic crises. Solutions to protect against nonpayment risks, improve supply chain resilience, and protect people and assets in various countries can involve public programs, private insurance, or a combination of both.

Surety, political risk, and credit insurance products are widely available to meet risk management needs in many scenarios. Often, such protection is critical in enabling investment projects to proceed.

For more information on how we can help your business, please contact us at creditspecialties@marsh.com for a confidential discussion.