Geopolitical tensions create significant increase in political risk losses up from 2017
According to a survey from Willis Towers Watson (NASDAQ: WLTW) and Oxford Analytica, increasing geopolitical concerns are causing a rise in political risk exposures with 55 percent of global organisations with revenues greater than $1 billion experiencing at least one political risk loss exceeding $100 million in value.
In addition, the survey revealed that the political risk implications of emerging market economic crises are increasing, reflecting the market reaction to a flare up in emerging markets – most notably in places like Turkey and Argentina.
In their annual Political Risk Survey, Willis Towers Watson and Oxford Analytica conducted interviews with senior executives of 40 leading global firms across different industry sectors to determine their response to ongoing global political volatility.
Other key survey findings
The most frequently reported political risk related loss was exchange transfer which impacted nearly 60% of those experiencing losses, followed by political violence (48%) and import/export embargos (40%).
The key geopolitical threats were seen as US sanctions policy, emerging market crises, protectionism/trade wars, and populism and nationalism.
While Russia and Vietnam were most frequently cited as countries where losses occurred, losses were recognised throughout Europe, Latin America, APAC, Africa and the Middle East.
60% 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.
More than 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 $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.
Paul Davidson, Chairman and Chief Executive Officer, Willis Towers Watson Financial Solutions, said “It is clear from our findings that political risk has increased significantly, now becoming a reoccurring and material cost of doing business. 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.”
Simon Coote, Deputy Director, Oxford Analytica, said “Companies typically grew up managing cyclical economic risks, not political. 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.”
Following the 2017 survey, we have expanded our study to include a formal survey of 40 leading companies, backed by in-depth follow-up interviews with 10 of the participants. The majority were Forbes Global 500 companies. The firms represented a cross section of industries including food and beverages, oil and gas, mining, pharmaceuticals, real estate, automobiles, and utilities. The companies are mainly headquartered in North America, Europe and Japan and have extensive global operations, including in “risky” regions. This sample should not be seen as representative of companies worldwide, but rather of a leading group of firms that both face significant political risk exposure and invest significantly in political risk management.
About Willis Towers Watson
Willis Towers Watson (NASDAQ: WLTW) is a leading global advisory, broking and solutions company that helps clients around the world turn risk into a path for growth. With roots dating to 1828, Willis Towers Watson has over 40,000 employees serving more than 140 countries. We design and deliver solutions that manage risk, optimize benefits, cultivate talent, and expand the power of capital to protect and strengthen institutions and individuals. Our unique perspective allows us to see the critical intersections between talent, assets and ideas — the dynamic formula that drives business performance. Together, we unlock potential.
VAPOR (Value at Political Risk) is a jointly created platform that allows global companies to assess and compare the financial implications of exposure to a suite of political risks – in individual countries – regionally, or globally – using an interactive online tool. For more information on VAPOR please visit the website.
About Oxford Analytica
Oxford Analytica is a global analysis and advisory firm drawing on a macro expert network to advise clients on strategy and performance in complex markets.