How to Deal with Political Risk
Boris Galonske shares an evergreen article on the ever-changing (but ever-present) issue of political risk and how to approach it regardless of what the current risk is.
Coming to grips with political risk
In the past, the concept of political risk has been somewhat obscure. Applications with relevance for day-to-day management have not been entirely clear. However, political events in early 2017 have fuelled the conviction that political risk is entering the global agenda again. Risk management instruments as established in the past require sharpening and need to be integrated into management routine.
Political risk or geopolitical risk is of increasing concern. From a Western perspective, we have experienced peace and increasing wealth in recent decades. Political risk has been basically discussed in the context of developing countries. As such, this has been of limited practical relevance for day-to-day management. Shifting political preferences can be perceived in all global regions. Two major events have caused a debate which political risks we will need to face in the future.
The European perspective – Brexit: The UK vote to leave the EU has come unexpected. There is a fear that in 2017 the EU might further disintegrate in the light of upcoming elections and fiscal instability.
The US perspective – Presidential elections: The victory of the Republican candidate had not been expected by the polls.
The new president is not only rolling out his domestic agenda. Other global regions are learning that the new US administration continuously adds new TOPs to global agenda.
So, is this covered by today´s understanding what political risk is? Are the tools available to add political risk to the management agenda?
Well established political and country risk landscape
Yes, there are surveys and tools which capture political risks.
Country risk ratings capture political risk on a country level. These are meant to inform investment decision making covering dimensions like legal stability, capital movements and default risk. These ratings provide little information about how businesses might be exposed to the evolving political risk and how these could be mitigated. Examples are e.g. Financial Times, Association for Financial Professionals, EIU, Euromoney, World Economic Forum.
Risk inventory in companies covers some aspects of political risk but certainly not the dimensions of the evolving political risk landscape. Risks in the risk inventory typically follow a geographic structure. Some political risks in the general discussions are somewhat generic and are difficult to handle in a specific company context e.g. `failing states`, `armoured conflicts`.
But a new class of political risks is evolving which can be summarized as `decreasing political consent`.
Key points include:
- Tools to capture political risk
- Implications for the risk management approach
- Tangible actions
Download the full PDF, Coming to Grips with Political Risk, on SilverberghPartners.com.