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Global Risks Forecast™

Political Risk Outlook 2017: Forecasting risk - Is 2016 the ‘new normal’?

Political Risk Outlook 2017: Forecasting risk - Is 2016 the ‘new normal’?

The Risk

Far from being an exception, 2016 was more likely a foretaste of things to come. Declining government stability – the result of challenges to the executive from their own political parties, other state institutions or the populace – was at the root of much of the global political risk witnessed over the last year. A new Verisk Maplecroft dataset projecting government stability until 2019 suggests the upheaval observed in 2016 was not an outlier, but will continue in 2017 and beyond.

In votes from Brexit to the election of Donald Trump, long-held conventions were felled by popular discontent. Dissatisfaction with elites in many regions of the world remains a key driver of political risk. Meanwhile, the impeachments of presidents in Brazil and South Korea, and a coup attempt in Turkey, completed a remarkable year. The legacies of all these events have the potential to impact government stability going forward.

All regions of the world are more likely to experience a decrease in government stability than an increase in the next three years (see figure Average probability of change in Government Stability Index Projection score for 2019, by region). Developing markets remain the most susceptible to a negative shift: MENA and Africa are the most exposed, with a 46% and 41% chance of deterioration for the average country respectively. However, it is businesses and investors used to the traditionally stable markets of Europe that will have to adapt the most to this new reality: the average European country faces a 28% chance of a decrease in its government stability.

Average probability of change in Government Stability Index Projection score for 2019, by region

The UK illustrates how the legacy of 2016 will shape the coming years. According to our projections data, the UK faces a 69% likelihood of deterioration in the level of government stability by 2019 (see figure Range of output outcomes for the UK in the Government Stability Index Projection for 2019). British politics is likely to remain unsettled due to the persistent and deep divisions over Brexit within both the electorate and government. The wide spread in the projected scores also highlights how the unexpected upheaval of the Brexit vote has created a wide array of potential outcomes in 2019, which, in practice, means uncertainty.

Range of output outcomes for the UK in the Government Stability Index Projection for 2019

France, Germany and Italy are other major European markets that display a highly uncertain environment. In each of these countries a wide range of possible outcomes are evenly balanced in terms of the probabilities associated with them.

These results are driven by the upcoming general elections in France and Germany, in which far-right populist parties are expected to continue their advance. In Italy, the government’s defeat in the constitutional referendum has made snap elections highly likely in 2017, in which anti-establishment parties are also likely to perform very well. Taken together, Europe’s four largest economies have become emblematic for the rise in political risk across a region long considered the world’s most stable in this regard.

The Implications

Deteriorating levels of government stability have profound implications for businesses in every sector, simply because this issue underpins the political risk landscape. Stable governments can develop and deliver coherent policy programmes, providing the certainty that boosts business and consumer confidence. A lack of stability, conversely, can lead to policy uncertainty or paralysis.

As governments react to challenges from the extreme left and right, and in order to placate public anger, we can expect to see them adopting unusual and unexpected policy positions. The calling of the UK’s referendum can itself be seen as an exemplar of this type; the divided nature of President Hollande’s term in office in France – with 75% tax rates in his first two years, and a focus on supply-side reforms in the latter half – provides another. In 2017, we can expect centrist governments facing re-election to adopt tougher language around business – particularly with regards to their stances on immigration rules and corporate tax planning – thus fuelling the uncertainty that was experienced in 2016.

However, governments that lack the necessary political capital or legislative numbers can find themselves unable to deliver on their agendas. Brazil provides an example of a country where the ongoing political crisis has drained the government’s capacity to deliver necessary economic reforms, while Germany’s next government will likely rely on the support of three parties, which will reduce the scope of any coherent policy agenda. Given the country’s vital role, a lack of policy direction in Germany can be expected to reverberate around Brussels, as the EU institutions continue to struggle with the many challenges that confront it.

While the outlook is not unremittingly bleak – many countries around the world are expected to see increased stability in the next three years – the outputs of the model suggest that 2016 was not a one-off. Savvy investors would do well to dust down risk management plans that have typically been reserved for high-risk, high-reward developing markets, and apply them in developed markets as well.

More forecasts on the key issues impacting trade and investment over the year ahead are available in our Political Risk Outlook 2017.

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