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What elevated levels of political risk mean for business in 2021

Company: EY

In nature and scale, it promises to be a year like no other. Executives should prepare for 10 key risks, from COVID-19 geopolitics to social unrest.

In brief

  • The geopolitics of COVID-19 will shape many political risks around the world, including emerging market debt and new industrial policies.
  • The three leading geopolitical powers — the US, EU and China — will compete for greater self-reliance, particularly in digital technologies.
  • While 2021 may be challenging, companies can leverage the enhanced agility and resilience exhibited in response to the pandemic.

Global political risk hit a multi-year high in 2020 and is set to persist in the year ahead. A combination of the COVID-19 pandemic, trade tensions, climate change, and a range of other factors means the probability that the performance of companies, markets or economies will be impacted by political decisions, events or conditions is at post-World War II highs.

It should come as no surprise that the top political risk we’re watching in the year ahead is COVID-19, which has already prompted unprecedented government policy responses. Pandemics are inherently geopolitical, involving issues such as national security, global leadership, and international cooperation and competition. In many countries, COVID-19 has also exacerbated tensions around economic inequality, access to healthcare and social justice. The pandemic has become a political-risk event on a global scale in addition to being a public-health crisis. It influences all of the EY Geostrategic Business Group’s top 10 political risks for 2021:

  1. Geopolitics of COVID-19
  2. Disentangling US-China interdependence
  3. Toward European strategic autonomy
  4. Neo-statism on the rise
  5. Reinvigorated climate policy agendas
  6. Geopolitics of technology and data
  7. US policy realignment
  8. Tipping point for emerging market debt
  9. Geopolitical dynamics in the Indo-Pacific
  10. Another wave of social unrest 

COVID-19 will not only influence these discrete political risks in 2021 — it will also generate high levels of uncertainty about the policy environment that companies face. Governments are developing pandemic response policies rapidly and innovating on them in real time. The uncertainty associated with such a dynamic policy environment across virtually all countries around the world simultaneously will challenge companies’ strategy development and execution. It has therefore never been more important for companies to dynamically monitor political risks for potential opportunities and challenges in the year ahead.

Political risks to monitor in 2021

The geopolitics of COVID-19 will shape the global operating environment for companies in 2021. Vaccine nationalism, export controls, restrictions on cross-border people movement and the domestic political consequences of the pandemic will create political risks in markets around the world. The pandemic therefore underpins the need to re-evaluate supply chains, talent decisions and approaches to building enterprise resilience.

Great power politics – particularly among the US, EU and China – will also be at play in 2021. China and the US will continue to try to disentangle their strategic interdependence amid an acrimonious trade relationship, technological competition, rival industrial policies and friction in areas of Chinese sovereignty. Meanwhile, the EU will wield its trade, investment and industrial policies and its ability to shape global norms and standards to move toward strategic autonomy.

Companies will also face several significant trends in regulatory and policy changes. The world will enter an era of neo-statism as COVID-19 continues to heat up the debate on self-reliance, causing many countries to launch efforts to reshore manufacturing or diversify supply chains. In addition, ambitious climate policy agendas are likely, as part of COVID-19 stimulus plans. As more countries announce carbon neutrality targets, it will put pressure on the laggards and raise the stakes for the 2021 United Nations Climate Change Conference (COP26) in November. The geopolitics of technology and data will be shaped by the increasing divergence of technological standards, proliferation in data privacy and localization rules, digital taxation efforts and antitrust enforcement will shape geopolitical competition.

The incoming Biden administration will realign US policy in 2021. President-elect Biden has declared a focus on strengthening industrial and environmental policies, and volatility is also likely in immigration, anti-trust and trade policy. Companies should expect supply chains and production in strategic sectors to shift more to the US economy, while green industries will have expanded growth and investment opportunities.

The sustainability of emerging market debt will likely hit a tipping point in 2021. Across large emerging markets, funding vulnerabilities are expected to be highest in Brazil, India, Mexico and South Africa. Despite international efforts at debt relief, debt resolution is likely to be complicated by COVID-19 and geopolitical dynamics. Growth prospects in key markets could suffer even as companies’ financial and tax burdens may rise.

The Indo-Pacific is becoming the main arena of global competition in the 21st century, underscored by recent tensions between India and China and Australia and China, among others. Geopolitics in the Indo-Pacific will likely be even more volatile in 2021 as the major and middle powers become more assertive in shaping geopolitics while balancing between the US and China. Government interventions will affect growth and investment strategies in the region, while trade agreements and maritime policies could reconfigure supply chains.

More information here.

Tags: Economics | Finance | Politics |

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