Increasing geopolitical concerns are causing a rise in political risk exposures, according to a survey by Willis Towers Watson and Oxford Analytica.
The annual Political Risk Survey revealed that 55% of global organizations with revenues exceeding US$1 billion have experienced at least one political risk loss worth over US$100 million. It found that the political risk implications of emerging market economic crises are increasing, reflecting the market reaction to a flare up in emerging markets such as Turkey and Argentina.
The survey interviewed senior executives of 40 leading global firms across different industries, to determine their response to ongoing global political volatility.
The most common political risk-related loss was exchange transfer, which affected almost 60% of organizations that incurred losses. This was followed by political violence (48%) and import/export embargos (40%).
Meanwhile, the key geopolitical threats listed were US sanctions policy, emerging market crises, protectionism/trade wars, and populism/nationalism. Six in 10 (60%) respondents reported that political risk levels had increased since last year, and nearly 70% stated that they had scaled back operations in a country as a result of political risk concerns or losses. Furthermore, over 70% reported holding back from planned investment as a direct result of political risk concerns.
Larger companies were more likely to report using avoidance strategies – among companies with more than US$1 billion in revenues, 82% stated that they had scaled back investments, and 86% had avoided future investments. Companies most frequently reported scaling back investments in Nigeria, Iran, Russia and Venezuela.
“It is clear from our findings that political risk has increased significantly, now becoming a reoccurring and material cost of doing business,” said Paul Davidson, chairman and CEO of Willis Towers Watson Financial Solutions. “If these levels remain elevated, companies will fall under increasing pressure from shareholders for greater levels of transparency around the losses actually incurred. Companies will need the ability to monitor, quantify and manage these risks as well as develop strategies to mitigate them.”
“Companies typically grew up managing cyclical economic risks, not political,” said Simon Coote, deputy director of Oxford Analytica. “However, with the recognition of rising losses due to political risk, it can no longer be excluded from executive decision-making. To better mitigate political risk exposure, companies need to reframe how they operate. Taking steps to manage political risk must become a requirement of doing business, not simply regarded as an inevitable cost of operating in challenging environments.”