3 Key Takeaways from Marsh’s 2021 Political Risk Map
Marsh Specialty’s Political Risk Map for 2021 offers a grim picture of the COVID-19 pandemic’s impact on global economic and geopolitical risks.
Released annually, the Political Risk Map is based on data from Marsh Specialty’s World Risk Review platform, which provides risk ratings for 197 countries on a 0.1 to 10 scale, with 10 being high risk. The ratings take into account nine key indicators:
- Contractual agreement repudiation risk.
- Country economic risk.
- Currency inconvertibility and transfer risk.
- Expropriation risk.
- Legal and regulatory risk.
- Sovereign credit risk.
- Strikes, riots and civil commotion risks.
- Terrorism risk.
- War and civil war risk.
The 2021 map breaks down evolutions in the risk landscape by region. While top risks vary from one country to the next, a few key themes emerged this year, driven by common challenges posed by the pandemic.
1) Inequality is growing, driving civil unrest and political divide.
The pandemic laid bare and exacerbated the chasm between rich and poor, on every level from local communities to the global stage.
An analysis by the International Monetary Fund (IMF) found that the employment and financial status of people with higher education levels were barely affected by previous pandemics, whereas “employment of those with only basic levels of education falls sharply, by more than 5% at the end of five years.” Workers in low-skilled jobs also tend to lack access to sick leave, unemployment benefits and medical insurance that enable people to cope with the pandemic’s health and economic impacts.
Inequality fuels civil unrest and drives political divide. According to Marsh’s report, “Government policies to address societal inequality will have a more prominent place in electoral platforms on both the left and the right, especially in middle- and low-income countries for decades to come.”
Inequality has also increased on an international scale, reflected recently in disparate access to vaccines. According to a report by UN Aids, rich nations are administering an average of one vaccine per second, while poor nations have yet to receive any doses.
Marsh predicts that vaccines will become bargaining chips, with richer nations leveraging vaccine access to gain an upper hand with allies and trading partners.
2) Sovereign debt is growing unsustainable, presenting credit and trade risk.
The COVID-19 pandemic has decimated national budgets and made a mockery of fiscal planning. Marsh’s Political Risk Map shows “larger increases than ever before in country economic risk across all regions.”
Many governments have implemented significant stimulus packages to prop up flailing economies.
Europe, for example, passed a €1.8 trillion financial aid package. With the latest round of stimulus payments, the U.S. has spent $1.9 trillion on COVID-19 relief.
While these will provide short-term relief, they are ultimately like applying a Band-Aid to a hemorrhaging wound. Increases in deficit spending will rack up more debt, while the long-term economic impacts of the pandemic make it less likely that those debts will be repaid.
Developing countries in particular will feel the sting of growing debt, as more industrialized nations re-evaluate the credit and trade risks of investing in or doing business with emerging economies. And because developing nations tend to have weaker health care systems and more limited access to vaccines, their economic recoveries will take more time, meaning rebuilding credit they need to thrive will be difficult.
Over the long term, credit risk will make trade relationships around the globe more tenuous, with less wealthy nations bearing the brunt of the impact.
3) Shrinking resources and re-evaluation of supply chain resilience are reshaping the global power hierarchy.
Access to basic resources like food, water and energy became strained in multiple regions as supply chains ground to halt in March 2020. Going forward, competition for these resources and control over their supply could reshape the influence of the world’s biggest trade powers.
China, for example, is beginning to lose its footing as the top global manufacturer and exporter. Its early economic recovery has stalled, and it faces increased competition from other producers who fared better during the pandemic — namely, Taiwan. Its top customers are also looking for ways to increase domestic manufacturing to both shorten and diversify supply chains, having seen the fragility inherent in relying so heavily on one region for its goods.
According to Marsh’s report, “It remains to be seen how U.S.-China trade will play out under a new U.S. administration. … Pre-COVID-19 geopolitical tensions, most notably persistent bilateral frictions with main trading partners over trade and technology, will pose continued risks to China’s sustained recovery and its growth prospects.”
Rising nationalism will also continue to reshape global trade. Per the report, “Nationalism is on the rise in both political and economic spheres as governments compete for strategic resources. Whether they come in the form of mineral resources, vaccines and other medicines, secure supply chains, advanced technologies, or trade routes, these resources are all vital to economic recovery and political competition in an increasingly multipolar world.”
Managing Political Risk
Now more than ever, businesses and public entities should invest in political risk, credit risk and surety insurance products to mitigate some of the uncertainty that lies ahead. Doing so can help entities increase supply chain resilience, secure trade and investment capital, mitigate contract risk, and lay the foundation for a sustainable, post-COVID recovery. &