The uneven global recovery from the COVID pandemic is set to see a rising tide of political risk and unrest.
According to a new report by Marsh, the world’s leading insurance broker and risk advisor, pandemic-induced economic stress will continue to exacerbate global political risk throughout 2021 and amplify the threats facing already-fragile economies.
The Marsh Specialty’s Political Risk Map 2021 found larger increases than ever before in country economic risk across all regions globally. This is being driven by increases in deficit spending over the last 12 months, which is adding to sovereign and commercial credit risks in the less developed economies of the world. According to the report, the strains on public financing in emerging markets will result from increases in sovereign indebtedness and may create unfavourable conditions for domestic and foreign-owned businesses.
The map is based on data from Marsh Specialty’s World Risk Review platform. It rates 197 countries and territories across nine indicators relating to security, trading, and investments.
“COVID-19 has widened the divide between rich and poor, setting some countries back decades in their efforts to reduce poverty,” the report warned. “Food security, water access, and energy costs remain acute pressures that can lead to growing nationalism and civil unrest. Societal inequality, meanwhile, will factor in electoral platforms, especially in middle- and low-income countries.
“Against this backdrop, many governments have implemented fiscal and monetary policies to fuel a recovery.”
“Our analysis projects a growing disparity between emerging economies and industrialised nations,” it added. “Strains on public financing in emerging markets will result from increases in sovereign indebtedness and may create unfavourable conditions for domestic and foreign-owned businesses.”
Stephen Kay, Global Head of Political Risks, Marsh Specialty, commented: “As the world recovers from the effects of COVID-19, we expect the issues of social inequality, country economic risk, and strategic resource nationalism to take centre stage in influencing political decision making. Despite many areas of heightened risk, opportunities remain for corporate entities, financiers, and investors. Insurance-backed political risk and credit solutions can help to secure trade and investment capital, unlock liquidity, and enable growth that will fuel and sustain the recovery from COVID-19.”
The report warned that the imbalance in the rate of recovery across the world will pose a significant threat.
“China’s early emergence from the pandemic combined with the unprecedentedly large stimulus measures by the EU and US are widely expected to generate a near-term economic boost,” it explained. “This effect should benefit certain countries, including oil exporters, but the impact may be transitory and only delay a reckoning with social inequalities, unsustainable debt, and the energy sector’s green transition.
“Nationalism is on the rise as governments fight for strategic resources. Whether 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.”
The report added: “The pandemic response adds a new weapon to the political arsenal of competing powers: vaccine diplomacy. Nations seeking influence are offering access to the vaccines as a bargaining chip with allies and trading partners. While COVID-19 responses obscured long-simmering geopolitical tensions in 2020, older tensions are expected to resurface as the pandemic comes under control and governments relax lockdowns, removing restraints that prevented outright interstate conflict.”
Findings from this year’s Political Risk Map 2021 mirror those in the World Economic Forum’s Global Risks Report 2021, which reported that the COVID-19 pandemic is increasing disparities between emerging economies and industrialised nations. It is also driving social fragmentation which, in the next 5-10 years, will weaken geopolitical stability.
According to this year’s report, social inequality is a pervasive risk across multiple regions – particularly in the Americas and Europe. In the future, inequality is likely to influence elections, contribute to political and economic nationalism, and could create conditions that spark open conflict.
“As a result of the COVID-19 pandemic, many countries established or amended state-backed trade credit schemes to provide economic stability,” said Marsh. “While these programmes are currently supporting domestic trade and exports, critics argue they are keeping zombie companies – those with heavy debt burdens and low cash reserves – alive. “The Political Risk Map 2021 points to the risk of mass bankruptcies among zombie companies once these government-backed schemes expire.”