Populism to shape political risk in 2017

23 February 2017

A series of milestone political events in 2016 threaten to shake-up the established world order, with potentially big implications for global trade and political risk in 2017.

Shock results

The election of Donald Trump in November 2016 surprised many political commentators. Trump’s inauguration does portend changes in the global trade framework and a period of increased trade protectionism, as well as reduced regulation in financial services and greater spending on infrastructure. 

The other big shock of 2016 was of course Brexit. While initial economic volatility has somewhat subsided, uncertainty over the shape of the UK’s eventual exit from the European Union (EU) will weigh on economic forecasts and investment decisions, increasing country economic risks over the medium term. 

Risks of populism 

The rise of populism seen in the Brexit vote and US election will elevate uncertainty in 2017, as unpredictable political leaders, such as Donald Trump, respond to voter discontent by implementing policies that alter the foundations of the global economy and trade. Populist politics are also likely to feature prominently in key European elections in 2017 – starting with the Netherlands in March, followed by France in April and Germany before late October.

These events will elevate political risks in a number of developed markets, traditionally regarded as stable, low risk environments.

Trade and protectionism 

Increased populist sentiment is likely to adjust in economic policy away from free trade and toward protectionism in many developed markets. President Trump will be a driver of this trend, having already said he will impose 45% tariffs on Chinese imports and renegotiate trade deals such as the North American Free Trade Agreement (NAFTA). The US is also unlikely to ratify the Trans-Pacific Partnership (TPP). 

Changes to the global trade framework and increased protectionism may inhibit growth opportunities for companies trading globally and the earning potential of companies who win contracts internationally. As part of this trend, governments may prioritise domestic companies in contracts, to the detriment of foreign firms. Domestic firms will also be pressured by governments not to transfer operations abroad.

However, many of Trump’s policies including the removal of regulations from a wide array of sectors and tax reform that significantly reduces personal and corporate taxes as well as investment proposals of at least USD 1 trillion in infrastructure development projects are set to reignite productivity growth in the US economy. 

Infrastructure boost

As electorates reject austerity, governments are likely to return to fiscal stimulus to boost growth, with a mixed effect on the risk environment. 

On the one-hand, this is likely to result in increased spending on infrastructure programmes, offering various investment opportunities for construction companies. Significant investment in infrastructure is forecasted in China, Indonesia and the Philippines while President Trump has promised infrastructure spending of some USD 1 trillion.

However, increased government spending could elevate sovereign credit risks in some emerging markets. In its 2017 Global Sovereign Outlook Moody’s highlighted that, whilst debt affordability has improved across sovereigns in the last 10 years due to low interest rates, debt levels have broadly increased across the board. 

With weaker sovereign creditworthiness, investors in some markets will be exposed to increased non-payment risks. Firms should ensure that they adequately understand their exposure to sovereign non-payment risks and, where necessary, consider insurance cover for the non-honouring of a sovereign guarantee or payment default by a sovereign entity.

Growing geopolitical risk

The rise in populism comes at a time of already heightened geopolitical risk, with terror attacks in Europe and strained relations between China, South Asian states and the US over competing territorial claims in the South China Sea. 

The civil war in Syria will continue to elevate risks in 2017, especially as the conflict spills over into Europe and Turkey – the latter saw the assassination of the Russian ambassador to Turkey in December 2016 and a shooting attack on an Istanbul nightclub on New Year’s Eve.

Coverage solutions

Companies should ensure that their insurance programmes adequately reflect the changing risk environment. 

Many of the elevated risks discussed can be addressed by political risk insurance, such as expropriation, forced divestiture, forced abandonment, license cancellation, political violence and currency inconvertibility, as well as political violence, terrorism and sabotage insurance and kidnap-for-ransom insurance

Opportunities in risk

Political shifts like Brexit and Trump should not be seen purely in terms of threats. A more dynamic political risk environment will also create opportunities for companies in 2017. 

Despite increased political risks, infrastructure is likely to perform well. And with effective risk management programmes in place, companies will be able to take advantage of the opportunities associated with this growth. 

For further information, please contact Eleanor Smith, Political Risk Analyst on +44 (0)121 626 7837 or email eleanor_smith@jltgroup.com

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