Category Risk Management

Global political volatility is leading to heightened levels of political violence and political risk

18 April 2018 Aon

Aon publishes its 2018 Risk Maps for political risk, terrorism and political violence.

Political Violence: The likelihood of interstate conflict, even involving major powers, is at the highest point since the end of the Cold War. Growing geopolitical competition and weak leadership in international diplomacy have contributed to increased risks of armed conflict over the last year.

Terrorism: The number of terrorist attacks in Western countries in 2017 (204) doubled – up from 96 in 2016, though casualties remained at similar levels. A number of war zones internationally continue to serve as incubators for international terrorism, although the global threat from Islamic State seems to be waning somewhat.

Political Risk: Last year saw political risk increase in 11 countries, with climate change and commodity shocks weakening fiscal positions, which are still struggling to recover from the commodity shock, and exacerbating rising levels of political violence and supply chain disruption.

According to Michael Ferendinos, Enterprise Risk Business Unit Head at Aon South Africa, Aon’s Risk Maps for 2018 also focuses on sovereign risk in Africa and its impact on global geopolitics. “The report highlights the positive influence that the slight global commodity price recovery will have on levels of sovereign risk across the continent. Turning our attention to the local landscape, negative foreign and domestic investor sentiment is expected to continue to put the brakes on the South African economy during 2018,” says Michael.

“The negative outlook, which is predominantly driven by the country’s political volatility and institutional weakness despite newly elected President Cyril Ramaphosa’s reformist message, means that a potential downgrade in the near future is not off the table yet. The risk of political paralysis in South Africa will remain high at least in the short to medium term,” Michael adds.

Terrorism and political violence

Political violence risks are rising globally, due to geopolitical tensions, a weakening of liberal democratic governance, and the repercussive effects of chronic conflicts around the globe.

For the third successive year, more country risk ratings have increased (17) than decreased (6). This year:

• 40% of countries are listed as being exposed to terrorism and sabotage risk;
• 60% to civil unrest risk, and;
• 33% to insurrection, war or coup risk.

Forty-six countries or territories are now rated as high or severe risk, representing 22% of the global total.

The likelihood of interstate conflict, even involving major powers, is at the highest point since the end of the Cold War. Growing geopolitical competition and weak leadership in international diplomacy have contributed to sustained or increased risks of armed conflict over the last year. Growing rates of polarisation over political, economic and social issues in mature democracies, and divisions between Western powers in the face of complex threats and risks, has also contributed to worsening global security and greater strategic uncertainty.

The number of terrorist attacks in Western countries in 2017 (204) was roughly double that of 2016 (96) but the total number of casualties in both years was broadly the same (1,092 in 2017), meaning that the lethality of attacks has fallen.

Notably, the threat posed by Islamic State has stopped spreading – but has not yet receded. IS mounted terrorist attacks in 29 countries on five continents in 2017, the same number of countries as in 2016 and up from 19 countries in 2015, but the global reach of IS appears to have peaked, and it seems likely that the number of countries where it is able to mount attacks, or inspire others to do so, will fall in 2018.

In particular, the tourism sector is having to manage the risks posed by increased terrorism, with the sector a highly attractive target for some terrorist organisations. In 2017, there were at least 35 attacks worldwide that directly targeted commercial sectors that are critical components of the tourism industry, such as hotels and resorts, nightclubs, civil aviation and visitor attractions.

Political risk

Last year political risk increased in eleven countries, compared to only two countries that saw reduced risk, showing the persistence of political risk across the globe, highlighted by increases in political violence and supply chain disruption. Many countries’ risks of supply chain disruption have risen due to both climate shocks and weakening fiscal positions.

Notably, over the last year, Asian countries’ trade linkages have been shifting away from the US and toward China. This is due to China’s economic development, and its rise as a trade giant. Amid China’s rise, Asia’s exports to the US have edged down from around 23% of total exports in 2000 to stabilize at around 12% in recent years. By the same token, Asia’s exports to China have more than doubled over the past decade to around 23% currently.

Elsewhere, political risks in Latin America are increasing ahead of a busy election season, delaying major reforms in Brazil and stoking fears of reform reversal in Mexico. Major countries are at risk of electing populist governments, and smaller countries are experiencing their share of political noise.

More broadly, the region experiencing most downgrades is Africa. Ongoing conflicts within countries, the erosion of democratic governance and increasingly frequent corruption scandals have led to more political violence. Groups such as IS and Boko Haram are taking advantage of fragile institutions and weak borders. Elsewhere, the Middle East contains some of the highest-risk countries in the world: Iraq, Syria, Yemen and Egypt. Instability and violence in the region have spilled over to neighbouring countries, undermining trade and tourism.

Mark Parker, Head of Property, Casualty and Crisis Management at Aon’s Global Broking Centre, says, “The global geopolitical environment remains volatile. This is reflected in the 2018 Risk Maps, with the interlinked threats posed by Political Violence and Political Risks growing. Given this heightened level of risk, and the rapidly evolving landscape against which businesses are operating, it is essential the companies understand their exposures and the potential for political instability to impact their people, property and supply chains. Ensuring that the right solutions are in place to mitigate and transfer risk is essential for firms operating internationally.”

According to Paulina Argudin, a Director at Country Risk Model, Continuum Economics, “The Aon Political Risk Map 2018 captures changing elements of political risks for businesses across emerging and frontier markets countries. Last year we saw political risk rising in several countries, driven mainly by increases in political violence and supply chain disruption. The persistence and rise of political risk across the globe demonstrates how relevant it is for businesses to identify and monitor specific political risk elements in their countries of operation.”

Henry Wilkinson, the Head of Intelligence & Analysis at The Risk Advisory Group, adds, “The Aon Terrorism & Political Violence Map 2018 points to inter-state tensions driving up longer-term political violence risks, as well as diversifying terrorist and extremist threats particularly in the West. The long-term trend of non-state actors being the predominant political violence concern in most regions is shifting towards geopolitical risks. These are more business threatening and demand board-level ownership. In such an unsettled environment, it is imperative that businesses invest in world class crisis and risk management programs that are intelligence-led, anticipatory and adaptive to rapid change.”

For more information and to access the interactive maps and full report please visit the Aon website.

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