Businesses remain wary of instability amid divided political landscape

23 April 2018 Authored by Consultancy.uk

For businesses operating internationally, political risk is a key factor for the businesses’ outlook and future prosperity. New research shows that political risk will remain a major concern for multinational businesses in 2018, driven by challenges, including ongoing Brexit negotiations, and trade protectionism.

The global political risk landscape was turbulent last year, and is likely to remain so in 2018, according to the 2018 Political Risk Map from Marsh. Based on data and insight from BMI Research, the 2018 incarnation of the consulting firm’s map provides country risk scores for more than 200 countries and territories. Each nation’s overall risk score is based on three categories of risk. These are political, economic, and operational, in order to demonstrate both short and long-term threats to stability.

Thanks to a tumultuous first year in the White House for incumbent President Donald Trump, the US is noticeably not in the most stable bracket of nations, which scored above 80 out of 100. While little material change has actually emerged from the new administration – thanks in part to Trump’s mismanagement of his Senate and Congressional majorities – the President’s failure to adequately condemn the actions of white supremacists in Charlottesville was just one of a plethora of instances where the US Government has contributed to growing instability.

On top of this, executive orders including the infamous travel ban on people from six Muslim nations, and proposed levies on international trade to motivate manufacturers to buy American mean an air of extreme unease continues to surround the Trump White House. Meanwhile mid-term elections in November could see the Republican Party robbed of its legislative majority, causing political gridlock, and further uncertainty for US citizens and businesses alike.

Key Short-term Political Risk Score Changes: Latin America

While Canada remains firmly in the green, in terms of Marsh’s analysis of North America, Latin America is another story altogether. In reaction to a number of US policy threats, including the notorious border wall proposed by Donald Trump, Mexico’s perceived stability has been further rocked by continued allegations of corruption being levelled at the incumbent government. As a result, the country’s stability score fell by 3.7 points on last year. With presidential elections in the summer looking increasingly likely to deliver victory for leftist candidate Andres Manuel Lopez Obrador, the country stands at a political cross-roads following a succession of neoliberal administrations.

Brazil, Colombia, Paraguay, and Venezuela, will also hold presidential and legislative elections in 2018, with their respective governments hoping the polls will help quell political unrest across the region – with each country having lost ground in terms of stability in 2017. While the wide-spread chaos in Venezuela may have caught more media attention in the US and UK, the country has been ranked as unstable for a long period of its recent history. In Marsh’s map, it is the former Dutch colony of Suriname which presents the most eye-catching example of rapidly depleting stability. Suriname saw its score deplete by 6.4 points last year.

Europe

As with the Americas, Europe’s perceived stability remains closely wedded to a string of election results occurring in quick succession. Last year saw Britain, Germany, France, Austria and the Netherlands, go to the polls,and, with the exception of France, each delivered an ultimately inconclusive result. The broad rule of thumb seems to be that the better populists and far right parties did in these elections, the worse the nation’s stability score becomes – and having seen a resounding defeat for Marine Le Pen’s fascist Front National, France seems to back this up, having improved by 4.2 points in 2017.

With regards to the less conclusive results, meanwhile, while the far right Forum for Democracy and Party for Freedom both made electoral gains in the Dutch general elections, the VVD (a liberal-conservative party) Prime Minister Mark Rutte’s survival at the polls was greeted by the assertion that right wing populism had been stopped in its tracks. The Netherlands’ stability in Marsh’s map reflects this, improving by 7.5 points, making it one of the most stable nations in Western Europe.

Germany, conversely, saw its strength weakened slightly in recent months, as the election cycle took a toll on its perceived stability. Chancellor Angela Merkel received a bloody nose from the vote, while the reactionary anti-Muslim group the AfD won a record share of the vote. The aftermath saw Merkel forced to cobble together a coalition with the Social Democrats, who had similarly under-performed at the election, in a process which took months to complete.

Key Short-term Political Risk Score Changes: Europe

While Austria’s vote seems to have come too late in 2017 to have much impact on its standings, the right-wing populist coalition it yielded is likely to see its stability impacted over the coming year, as will the Italian elections of 2018. Polling had suggested the populist Five Star Movement and the far-right Northern League would win the largest vote shares in Italy’s election, seeing the country’s stability plummet by over 7% last year, and, as those fears were realised, Italy could see this score fall further over coming months.

In the UK, meanwhile, the hung parliament caused by Britain’s surprise snap election left Theresa May’s Conservative government teetering on the brink of collapse. In spite of this uncertainty, it was the longer-term issue of Brexit negotiations which remained the key driver to the UK’s inability to break into the most stable category in Marsh’s report. With negotiations making little progress over the past year – the potential for major changes to global trade remain, including the possibility of import and export tariffs, and the further restriction of the movement of labour to and from one of the world’s largest economies.

Africa

While Africa remains an attractive prospect for investors, this may change if the current atmosphere of instability is maintained. The dethroning of the Mugabe regime in Zimbabwe, and the forced departure of scandal stricken South African premier Jacob Zuma have both been accompanied by growing tension in Africa’s Central and Eastern nations.

Zimbabwe was up by 7.7 as the country’s long-overdue leadership transition was smooth, while Angola saw its score increase by 8.1. Angola similarly saw a smooth succession occur, as long-time President José Eduardo dos Santos was replaced by João Lourenço in September 2017. However, not all such transitions have been so easily executed.

Key Short-term Political Risk Score Changes: Africa

Cote d’Ivoire has seen political risk rise off the back of political jockeying to succeed President Alassane Outtara in 2020, and is now noted as considerably less stable, falling almost ten points (9.2). Following another disputed election, Kenya has fallen significantly on the back of regional unrest, and the country faces considerable difficulties in the face of political fights in the coming year, while the Democratic Republic of the Congo fell by 7.3 points, though it remains a strategically important source of minerals globally – highlighting wider geopolitical fractures.

Overall then, the message from Marsh’s annual report remains clear. While challenges facing nations vary in shape and size, businesses would do well to keep a weather eye open on the political climate of any country they trade in.

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