< News | 26.06.2020

PANDEMIC POLITICS

PANDEMIC POLITICS

How the pandemic has been handled by global governments

The Covid-19 crisis has added to an already challenging political risk landscape. Tim Evershed examines how the market will cope

As this year began, the political risk insurance market had a fairly normal roster of risks on its radar.

The transition towarda multipolar world order seen in 2019 – with multiple challenges to multilateralism and free trade – was expected to continue. The agreement between the US and China on phase one of a trade deal was considered likely to bring only temporary respite. In fact, Sino-American rivalry was expected to deepen in 2020, particularly as the US presidential election approached.

Elsewhere, there were ongoing concerns about the situation in the Middle East, where an escalation of Iranian aggression looked likely following the US drone strike on General Soleimani.

In terms of country risk, there was unrest and political violence in Hong Kong and Chile; the disputed election result in Bolivia; and the continued fallout from Brexit.

COVID-19 IMPACT

However, the outbreak of the novel coronavirus (Covid-19) has changed risk profiles around the world with its huge impact on countries, businesses and people. Covid-19 has put governments, health systems and finances under pressure, with trade and supply chains facing major disruption.

According to Marsh JLT Specialty’s country risk ratings, currency inconvertibility and transfer risks saw the most widespread increases, while contractual agreement repudiation risks also increased in many nations.

Roddy Barnett, head of political risk at Beazley, says: “The risks we saw at the beginning of the year haven’t gone away, but the landscape has certainly been turned upside down by the pandemic and there are many other risks that are likely to emerge from the coronavirus episode.

“Our attention is particularly focused on the secondary effects of the pandemic – the likely recession or even depression that’s going to result from the global shutdown that’s been necessary to contain the spread of this disease. Oil and commodity prices have absolutely plunged as a result of a really sharp dip in demand.”

We will see an uptick for non-payment by governments of certain debt obligations

Mr Barnett continues: “That will impact the emerging markets and frontier markets where we focus on covering risk. In particular, they will be in a difficult spot because a lot of their economies are dependent on commodity export flow.

“The impact of Covid-19 for us is more about knock-on effects rather than the pandemic itself. There’s a high risk of certain countries being unable to sustain debt repayments going forward.

“There are also tertiary events feeding off of these. General political instability from these economic crises that you may see and governments wrestling with how to address these economic challenges ahead,” he adds.

POLITICAL POSTURING

The Covid-19 crisis has also highlighted the shortcomings of some political leaders, who have abandoned long-term goals in favour of short-term wins.

Although these tactics have proved adept at winning elections and extending political lifespans, they are often at the expense of sustainable gains.

Oksana Antonenko, director at risk consultants Control Risks, says: “Tactical thinking drives political uncertainty, unpredictability and insecurity. Tactical politics diminish the capacity of political leaders and institutions to offer strategic solutions to pressing global problems such as pandemics, climate change, nuclear proliferation, ethno-sectarian conflict, rising inequality and deteriorating human security.

“More and more often, businesses are expected to take the lead in delivering global public goods in a more strategic and globalised manner than many national governments. In recent years, businesses have borne the brunt of the rising costs of trade wars and multiple sanctions regimes, government-mandated disruption to their global supply chains and regulatory volatility driven by polarised domestic politics.”

However, it is the immediate economic fallout from Covid-19 that will dominate companies’ risks perceptions. These range from a prolonged recession to the weakening fiscal position of major economies, tighter restrictions on the cross-border movement of goods and people and the collapse of a major emerging market.

STERN TEST

These conditions will provide a stern test for the political risk insurance market, but Mr Barnett says it is one the market is ready to meet.

He adds: “We remain open for business and we have many clients who have long track records of staying open for business through good times and challenging times. There’s been an adjustment of underwriting appetite. We’ve had to respond to the changing risk environment; there are certain longer-term risks that perhaps we would be cautious about putting on the books now.

“Although we have seen – and in the near term will likely continue to see – a huge drop in trade volumes, certain key goods and services still need to get through. Countries still need to import food, fuel and medical equipment. Governments will still prioritise payments for these goods.”

Mr Barnett concludes: “In terms of the outlook for the next year or two, we will definitely expect an uptick in claims in the market – that’s only natural in this part of the economic cycle. In particular, we will see an uptick for non-payment by governments of certain debt obligations. This is nothing new for the market; we supported clients through the aftermath of the financial crisis 12 years ago and although we paid out hundreds of millions, we emerged quite strongly.”

Tim Evershed is a freelance journalist

Picture Credit | Getty Images

Share