The threat of Islamic State (IS) has somewhat subsided in the region in recent months, but conflicts remain. BMI Research raised Syria’s STPRI from 22.9 to 27.9 as President Assad’s government regained territory from rebels and IS is considered less of a threat. However, BMI Research noted that the threat of violence in Syria, as well as in Iraq, Bahrain, and Yemen, persists. At the same time, Qatar continues to face a diplomatic crisis, while tensions between Saudi Arabia and Iran remained heightened. Other risks in the region stem from conflict between Israel and Hezbollah in Lebanon, between Israel and Hamas in Gaza, and more broadly, the risk of a new Palestinian uprising against Israel.
Tensions related to North Korea have dominated the region’s risk landscape over the past few months. BMI Research predicts the North Korean missile crisis will reach a decisive moment this year. North Korea has typically used important anniversaries to conduct missile tests, and BMI Research believes it will do so again this year.
In the East and South China Sea, tensions between China, South Korea, Japan, and Vietnam over disputed islands remain, but did not develop further in the latter half of 2017. China’s economy has experienced exponential growth over the past few years; however, this slowed in 2017, and it is uncertain whether it will pick up this year.
RISK MANAGEMENT CONSIDERATIONS
Multinational organisations face a complex and ever-changing political risk environment. Social instability and adverse government actions are among the most common examples of political risks that multinational organisations face when trading or investing in foreign countries.
Does this mean businesses should forego opportunities if they happen to be in potentially unstable areas? Not necessarily. While political risks are typically not directly controllable, in many instances they can be mitigated through credit and political risk insurance, providing greater confidence in the benefits of the opportunity.
Historically, multinational organisations have purchased political violence and/or terrorism insurance because the rates were typically lower than for political risk insurance. But companies should keep in mind that this strategy has the potential to leave significant gaps. Whether it is a political violence or a terrorism insurance policy that responds to a claim often depends on how insurers and governments view specific events. In some instances, terrorism and political violence insurers have denied coverage, claiming that a particular event should be covered under the other type of policy. Alternatively, political risk insurance can help bridge gaps by including coverage for both perils, potentially avoiding such disputes.
Trade contracts for the supply of goods and services with government or private entities in emerging countries are often exposed to a number of underlying political risks. Increased global protectionism, the restriction of hard currency payments to overseas companies, and the imposition of trade embargoes and sanctions are recurring issues in countries where governments attempt to enforce foreign policy objectives, influence domestic public opinion, or manage economic issues. Moreover, companies may find themselves faced with internal counterparty limit constraints that keep them from competing effectively in target markets. Contracts can be covered for terms of up to three to seven years or, if a buyer holds sovereign status, more than 10 years.
ABOUT THE POLITICAL RISK MAP 2018
Drawing on data and insight from BMI Research, a leading source of independent political, macroeconomic, financial, and industry risk analysis, Marsh’s Political Risk Map 2018 presents a global view of the issues facing multinational organisations and investors. This interactive map rates countries on the basis of political and economic stability, giving insight into where risks may be most likely to emerge and issues to be aware of in each country.
Under BMI Research’s method, a country’s score is ranked out of 100 — the higher the index, the less political risk. This report considers the changes in the short-term political risk index (STPRI), a measure that takes into account a government’s ability to propose and implement policy, social stability, immediate threats to the government’s ability to rule, the risks of a coup, and more.
For more information on BMI research, visit their website: bmiresearch.com.