Political risk spans a broad and amorphous bucket of perils, from financial risks such as contract abrogation or non-payment by sovereigns or private companies to government confiscation of assets, civil commotion and political violence.

According to Coface’s Political Risk Index, Asia scored 45% on the latest risk ranking, above the world average of 35%. Within the region, South Asia has the highest score for political risks, followed by Southeast Asia. East Asia has reported the fastest acceleration in political risks over the last decade – particularly in China, where the overall level rose by 7.2 percentage points between 2007 and 2017.

For developing nations and emerging markets, the stakes are particularly high as, in many cases, their ability to continue to grow economically and maintain social order will depend on the continuation of a delicate balance between the rights of individuals, protection of domestic industries, minimizing income disparity, and maintaining security. The continuing rise of economic nationalism is perhaps the biggest threat to cross-border trade, investment and lending in Asia. Since so many Asian nations depend on international trade to maintain economic growth, deterioration in the global trade regime will have a potentially severe impact throughout the region.

Further adding to it, the unpredictability of US policies and worsening US relations with Russia, China, North Korea and Iran, to tensions in the China Sea, Crimea and the Middle East has made today’s political landscape intense, unstable and constantly evolving. Then, there are ongoing economic uncertainties, from foreign exchange rates, Brexit and commodities prices to interest rates and central bank policy.

Political risks in Asia are at extremely high levels, owing to the North Korean missile crisis, Trade protectionism , potential government failure in Indonesia in managing its Muslim extremist groups & regional terrorism and risk of Myanmar’s ‘experiment’ with democracy if it proves to be a failure, all the progress that has been made could be lost, with the military reassuming control of the government and other democratic movements in the region losing impetus as a result.

South and Southeast Asia feature a high level of security risks due to ethnic, religious and linguistic fractionalisation, resulting in tensions between the different groups. Examples of these countries include India, Pakistan, Myanmar and the Philippines.

These are indeed politically risky times, and this is manifesting itself in a worsening credit environment for companies doing business in many markets around the globe. Economic growth and political risk are deeply interconnected. On the one hand, the uncertainty associated with an unstable political environment may reduce investment and the speed of economic development. On the other hand, poor economic performance may lead to government collapse and political unrest.

INSURANCE SOLUTION:

Trade Credit Insurance (TCI) is a financial tool that protects the business from non-payment of account receivables as a result of commercial risks, protracted default or political risks.

• Commercial risk refers to the failure of a buyer to pay its trade credit debts within the agreed credit period, whether due to temporary financial problems or insolvency.
• Political risk includes; war in the buyer’s country; cancellation of contract by the government of the buyer’s country; or governmental regulations such as embargo or quotas that prevent the export or import of goods

Trade Credit Insurance is also an effective risk management tool that can:

• Protect and improve “cash-flow”
• Enhance balance sheet, optimise working capital and reduce the cost of finance
• Increases sales and profitability
• Improve and strengthen credit control and management procedures

Source : www.coface.co.in