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RISK: Terrorism, falling commodity prices are top political risks in 2016: Marsh

January 20, 2016   by Staff

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mapsMultinational companies should be ready to face any type of political and economic risks in both emerging and developed markets, Marsh says in its 2016 Political Risk Map. Based on data from Business Monitor International (BMI), the map rates more than countries on political, macroeconomic and operational risk.

Terrorism is one of the top risks companies and investors face this year, with BMI predicting the “war on terror” will continue for at least another decade.

Neither the U.S. nor Russia want to risk fighting long, difficult ground wars as they have in the Middle East and Afghanistan, says Yoel Sano, BMI’s head of Global Political and Security Risk. “That means the most likely response from these and other governments will be an air campaign, which may not be enough to defeat the Islamic State.”

This will likely lead to prolonged instability in the Middle East, as well as an increase risk of terrorist attacks in North America, Europe and Asia.

Terrorism, along with the migrant crisis and austerity measures, have contributed to the rise of anti-establishment crises in Europe. Marsh doesn’t think they will win power but their growing influence will continue to call into question the EU’s open border system. This also brings up the question of the UK leaving the EU, the likelihood of which BMI pegs at 35 percent. A referendum on the “Brexit” is expected to occur this year.

A third major risk is falling commodity prices, with Brent crude oil plummeting from $112 U.S. a barrel in June 2014 to $38 in December 2015, the lowest price in more than a decade. BMI predicts 2016 will see an average price of $42.50 per barrel, which will affect political risk in several oil-exporting countries.

“Many net oil exporters already faced significant political risks before the drop in oil prices, which could be exacerbated if prices remain low,” Sano said. “In Venezuela, for example, voter dissatisfaction with the poor economy and high inflation contributed to the opposition party’s victory in December’s legislative elections. That could lead to a move away from the statist system in the long run, but the near-term impact is greater political risk stemming from internal political clashes.”

Prices for cotton, gold and copper are also falling, partly due to the slowdown in China’s economy and their reduced appetite for importing raw materials.

Other important political risks include the 2016 presidential election in the U.S., succession risks and rivalries among “great powers,” such as China and Japan in the East China Sea, Russia and NATO in the Baltic states, and North and South Korea.

To prepare for political risks, Marsh says, investors and businesses should build resilient supply chains and develop alternatives, manage their credit risk, test crisis plans in advance and consider credit and political risk insurance.

This story was originally published by Canadian Insurance Top Broker.