A study by insurance broker Marsh and research firm BMI suggests political instability and terrorism are likely to increase as once-robust economies in growth markets slow and commodity prices fall sharply.
Among the leading causes of risk for international companies is falling commodity prices, which contributes to economic and political challenges in a variety of countries. Declining oil prices have attracted the most attention, falling from a high of $112 a barrel in June of 2014 to $33 a barrel this week (a 20 percent rebound from early January).
Sharp decreases in oil prices can cause economic disruptions and exacerbate political risk in Africa, the Middle East, South America and Russia, as well as countries and companies that have business partners in those regions.
Although the declines are not as steep as those for oil, prices for commodities including cotton, gold and copper have all decreased from mid-2014 levels — in part from reduced demand from China.
“Falling prices portend an increase in political risk in many emerging markets whose economies rely on commodities exports, such as Brazil,” the study says. “The drop in prices could also have lasting economic effects on resource-rich developed economies, including Canada and Australia.”
Connected Economies
On the economic front, China’s compelling GDP growth slowed to an official 6.9 percent in 2015, and is forecast at 6.3 percent in 2016. China’s economy is being strained by governmental reforms, a falling real estate market, corporate over-leveraging and rising wages — all of which combine to make the country less attractive for U.S. manufacturers and as a consumer market.
Similarly, Brazil’s GDP growth has slowed to 4.4 percent as a result of rising inflation, interest rates and unemployment, and international investment in Russia has been minimal since 2012.
India remains an attractive opportunity, helped by government initiatives to attract international investment and stabilize its currency.
Terrorism Expanding
Economic and political instability also contribute to growing terror-related risks expanding beyond the Middle East and Northern Africa to include Europe, Asia and North America. Along with a direct threat to employees working in affected region, the growing terrorism risk harms economic prospects while feeding an unwanted cycle of political challenges.
Global Rivalries
U.S. political risk managers also have to pay attention to growing tensions among nations with different interests, such as the Koreas, China and Japan, Russia and Turkey and other global rivals.
“Both China and Russia appear intent on flexing their muscles and playing a greater role in the politics of many regions, as evidenced by China’s plan to build a military base in Djibouti, in the Horn of Africa,” said Yoel Sano, BMI’s head of global political and security risk, in the study. “We expect that rivalries between both the great powers and regional powers like Turkey will continue to develop, including some direct confrontations and proxy wars in the coming years.”
Managing the Risk
The study advocates taking a number of measures to help mitigate political risk, including:
- Managing credit risk. If a government collapses or faces domestic turmoil, it may be less willing or able to honor financial commitments. This can harm international investment as well as domestic companies and their global business partners. U.S. companies should review credit risk policies.
- Evaluating global supply chains. Companies sourcing products or components in one nation should consider the potential effects of a crisis in that region, and identify alternative suppliers and develop response plans.
- Protecting your people. Developing crisis communication and, potentially, evacuation plans can help increase safety and confidence of expatriate employees working overseas and reduce the potential effects of an international crisis.
Although political risk is a fundamental issue for companies operating outside the United States, paying attention to local and regional conditions and developing effective response plans can help companies mitigate the exposure and increase the benefits that attracted them to potential global hotspots.