Pandemic-induced economic stress will continue to exacerbate global political risk throughout 2021, according to a new report by insurance broker and risk advisor Marsh.
Marsh Specialty’s Political Risk Map 2021 shows larger increases than ever before in country economic risks across all regions around the world. The spikes are being driven by increases in deficit spending over the past 12 months, which is adding to sovereign and commercial credit risks in less developed economies. Strains on public financing in emerging markets will result from increases in sovereign indebtedness, possibly creating unfavorable conditions for domestic and foreign-owned businesses, Marsh said.
Marsh’s findings mirror those in the World Economic Forum’s Global Risks Report 2021, which found that the COVID-19 pandemic is widening disparities between industrialized nations and emerging economies. The pandemic is also driving social fragmentations, which will weaken geopolitical stability in the next five to 10 years, Marsh said.
Social inequality is a pervasive risk across several regions, particularly in the Americas and Europe. That inequality is likely to influence elections and contribute to political and economic nationalism, and could create conditions that lead to open conflict, according to Marsh.
Many countries established or amended state-backed trade credit programs to bolster economic stability during the pandemic. While those programs are currently supporting domestic trade and exports, critics warn that they are keeping “zombie” companies – firms with mountains of debt but low cash reserves – on life support. Marsh’s report warned of the risk of mass bankruptcies among these zombie companies once government-backed economic programs expire.
“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 center stage in influencing political decision-making,” said Stephen Kay, global head of political risks at Marsh Specialty. “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.”