Geopolitical Threats on the 2016 HorizonGlobal Practice Leader, Credit Specialties at Marsh
Businesses experienced unprecedented international expansion during the last decade and have come to rely on operations outside of their home countries like never before. As these organizations have grown more global, one simple truth has become clear: Multinational businesses must now be prepared for any type of political or economic risk anywhere in the world.
This week, Marsh and BMI Research released the 2016 edition of the Political Risk Map, our annual look at the most difficult countries in which to operate and the major political, economic and societal trends that could give rise to higher credit and political risks globally. Along with overall country risk scores for more than 200 countries and territories, the map and accompanying report identifies eight major drivers of political risk in 2016. Two of the most critical risks: terrorism and falling commodity prices.
War on Terrorism Intensifies
Prompted by recent attacks in Paris, the U.S. and elsewhere, world powers have renewed their focus on combating terrorism. BMI expects the war on terror that began after the September 11, 2001 attacks to continue for at least another decade.
A prime target in the fight against terrorism is the Islamic State (IS), whose growing influence in the Middle East and North Africa has contributed to regional instability. In Syria, France and other Western countries have intensified airstrikes against IS targets after the Paris attacks, but that country’s prolonged civil war will continue deep into 2016. The flow of refugees from Syria has presented security concerns and strains on government services for both neighboring countries, such as Turkey, and many European Union members. Meanwhile, in Iraq, the government’s challenge is to regain control of Mosul, Iraq’s second-largest city, from IS forces. But even if Mosol is recaptured, tensions between the Shi’a-dominated government and the Sunni minority will continue.
Falling Commodity Prices
Since the start of 2014, prices for commodities, including livestock and precious and industrial metals, have dropped precipitously. Oil prices, for example, fell from $112 per barrel in June 2014 to just $38 per barrel in December 2015, their lowest price since July 2004. Prices are expected to rebound somewhat in 2016—BMI forecasts average oil prices of $42.50 per barrel this year—but that’s still far from recent highs.
Those falling prices have hurt the economies of commodity-exporting countries, contributing to political risks there. Angola, Congo-Brazzaville, Equatorial Guinea, Iran, Iraq, Nigeria, Russia and Venezuela, for example, are all at greater risk as a result of falling oil prices. And coupled with rising interest rates and currency slumps, the decline in other commodity prices is likely to have lasting economic effects in both emerging markets such as Brazil and developed markets such as Canada and Australia.
Managing Political Risk
As these economic and political factors continue to put pressure on several countries’ economies, multinational businesses must prepare for the possibility that political violence, unrest or other large-scale crises can quickly develop in any part of the world. That includes countries that have historically been seen as safe or stable.
Businesses can prepare for these risks in several ways:
- Manage credit risk. Businesses should review their credit risks and credit-control policies and procedures and evaluate the potential impact of political risk on the countries in which they, their customers and suppliers operate.
- Build resilient supply chains. Before a crisis develops, an organization should understand how a crisis in one country can disrupt its global supply chain. Businesses should also have response plans in place to allow for the use of alternative suppliers and/or ports, and to communicate with customers and suppliers as needed.
- Protect employees. Developing and testing crisis plans in advance can help ensure effective communication during and immediately following a crisis.
- Protect assets through insurance. Credit and political risk insurance can protect against a variety of risks, including expropriation, political violence, currency inconvertibility, non-payment and contract frustration.