Investors urged to consider trade credit, political risk insurance in emerging markets

  Insurers and brokers are warning companies operating or investing in emerging markets to consider the economic and political risk of these often distressed territories and to invest in trade credit and political risk insurance.

Following the financial crisis of 2008 and the ensuing recession in many Western economies, companies have sought opportunities in emerging and frontier markets. But while these new economies offer greater potential reward, there is also greater political risk.

Furthermore, this risk is taking on more economic facets as the contagion of the banking sector spreads. This is evidenced by the fact that the Political Risk Map compiled by Aon has added banking sector vulnerability, risk to fiscal stimulus and the risk of doing business to the political risk rating given each country.

According to Evan Freely, global leader, Marsh’s Political Risk & Trade Credit Group, political and economic risks are forever intertwined. “A country that is struggling economically is more likely to experience civil unrest and the government is more likely to take populist measures that may not be in the best interests of the country.”

These measures may manifest in the cancelling of contracts held by overseas companies and other protectionist policies like trade embargoes that come at the expense of overseas companies.

Consequently, any company considering trading with, or operating in, an emerging or distressed market must ensure the country has a robust legal system, especially concerning property rights, and consider areas such as corruption, government intervention, regulatory regime, bureaucracy, fiscal policy, freedom of speech and political stability.

Increasingly, political risk policies are being combined with trade credit insurance, which covers a supplier’s risk of non-payment from counter-party. When the counter-party is based in a stressed or emerging market, political and economic risk becomes much more pronounced—for example if that country significantly devalues its currency—therefore creating a greater probability of default.